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The Information Content of a Convertible Debt Offer Announcement

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  • Corrado, Charles J
  • Patel, Ajay

Abstract

We develop a model of convertible debt financing that combines issue and call decisions into a common framework. The model suggests a role for refinancing costs in a manager's efforts to signal firm productivity to investors by an appropriate choice of debt issue terms. A cross section of convertible debt offers can be divided into two groups: a high conversion ratio group and a low conversion ratio group. The model predicts that high conversion ratios are negatively correlated with offer announcement stock returns and low conversion ratios are uncorrelated with offer announcement stock returns. The model is tested on a sample of 124 convertible debt offer announcements. Test results support model accuracy. Copyright 1995 by Kluwer Academic Publishers

Suggested Citation

  • Corrado, Charles J & Patel, Ajay, 1995. "The Information Content of a Convertible Debt Offer Announcement," Review of Quantitative Finance and Accounting, Springer, vol. 5(3), pages 309-325, September.
    • Handle: RePEc:kap:rqfnac:v:5:y:1995:i:3:p:309-25
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    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • N27 - Economic History - - Financial Markets and Institutions - - - Africa; Oceania

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