Convertible notes: the debt versus equity classification problem

Magennis, Darren; Watts, Edward; Wright, Sue

doi:10.1016/s1042-444x(98)00033-4

Cited by 20 publications

(13 citation statements)

References 11 publications

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“…Hence, Western European convertibles are structured to be more debt-like than their US counterparts. Based on the signaling model of Myers and Majluf (1984), we expect the delta to have a negative influence on convertible debt announcement returns (see also Davidson et al, 1995;Magennis et al, 1998;Burlacu, 2000).…”

Section: Issue-specific Characteristicsmentioning

confidence: 99%

“…1 Over the past decades, a number of studies have explored the variables driving cross-sectional differences in the stock price reactions to convertible debt announcements. These papers tend to focus either on the characteristics of the issuing company (Dann and Mikkelson, 1984;Lewis et al, 1999Lewis et al, , 2003 or on the convertible debt design (Davidson et al, 1995;Magennis et al, 1998;Burlacu, 2000).…”

Section: Introductionmentioning

confidence: 99%

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Are there windows of opportunity for convertible debt issuance? Evidence for Western Europe

Dutordoir

Gucht

2007

Journal of Banking & Finance

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This paper hypothesizes that hot convertible debt windows represent periods with lower convertible debt-related financing costs. Supporting this premise, we find that the stock price impact of Western European convertible debt announcements is significantly less negative during hot convertible debt windows. Importantly, this result holds while controlling for equity and straight debt issuance volumes and for macroeconomic conditions. In addition, stockholders are less sensitive to issuerand issue-specific financing costs during hot convertible debt markets. Overall, these findings indicate that hot convertible debt markets represent windows of opportunity for convertible debt issuance. Firms with high idiosyncratic financing costs act accordingly by timing their convertible debt offering during a hot market.

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Section: Issue-specific Characteristicsmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Are there windows of opportunity for convertible debt issuance? Evidence for Western Europe

Dutordoir

Gucht

2007

Journal of Banking & Finance

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“…The announcement effect of different corporate securities has been the subject of numerous studies, such as Mikkelson and Partch (1986) for equity, Eckbo (1986) for bonds, Dann and Mikkelson (1984) for convertible securities and Gosh, Varma and Woolridge (1990) for exchangeable bonds, among others. Smith (1986) and Magennis et al (1998) give an overview of the literature showing that the issuance of debt is not associated with a significant stock price reaction, the issuance of pure equity is associated with a significantly negative reaction of the stock price. Convertible bonds and exchangeable bonds have debt and equity components.…”

mentioning

confidence: 99%

New evidence on the announcement effect of convertible and exchangeable bonds

Ammann

Fehr

Seiz

2006

Journal of Multinational Financial Management

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This study investigates the announcement and issuance effects of offering convertible bonds and exchangeable bonds using data for the Swiss and German market during January 1996 and May 2003. The analysis shows that announcement effects of convertible bonds and exchangeable bonds are associated with significantly negative abnormal returns.Unlike previous studies, it also investigates the effect of the market return of the announcement effect and finds that the negative abnormal returns are significantly more pronounced when previous market returns have been negative. Furthermore, we analyze the relation between the announcement effects and equity components by controlling for the equity signal sent to the market. We find the size of the equity component of an issue to have a strong influence on the announcement effect for convertible but not for exchangeable securities and offer an explanation for this difference. JEL code: G12, G14, G15, G32 Abstract This study investigates the announcement and issuance effects of offering convertible bonds and exchangeable bonds using data for the Swiss and German market during January 1996 and May 2003. The analysis shows that announcement effects of convertible bonds and exchangeable bonds are associated with significantly negative abnormal returns.Unlike previous studies, it also investigates the effect of the market return of the announcement effect and finds that the negative abnormal returns are significantly more pronounced when previous market returns have been negative. Furthermore, we analyze the relation between the announcement effects and equity components by controlling for the equity signal sent to the market. We find the size of the equity component of an issue to have a strong influence on the announcement effect for convertible but not for exchangeable securities and offer an explanation for this difference.

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“…3 Other studies such as Magennis, Watts, and Wright (1998) and Abhyankar and Dunning (1999) found signifi cantly negative effects for the Australian and the UK markets respectively. Outside the US and the UK market empirical evidence has been somewhat less conclusive.…”

mentioning

confidence: 97%

Why do companies issue convertible bond loans? An empirical analysis for the Canadian market

2008

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To identify issuer motives, we study the determinants of announcement effects of convertible debt issues in the Canadian market. Classified into equity- and debt-like, wealth effects are significantly more negative for equity-like convertible bond issuers. Equity-like convertibles are significantly negatively affected by agency costs of equity. However, agency costs of debt have no significant effect on debt-like convertibles. Consistent with Stein (1992), this suggests convertibles in particular represent a substitute for equity. Moreover, convertible debt offers announced by income trusts experience significantly less negative wealth effects than offers by nontrusts - a finding explained by a more debt-like convertible design, very low agency costs of equity in case of income trusts, or both

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Convertible notes: the debt versus equity classification problem

Cited by 20 publications

References 11 publications

Are there windows of opportunity for convertible debt issuance? Evidence for Western Europe

Are there windows of opportunity for convertible debt issuance? Evidence for Western Europe

New evidence on the announcement effect of convertible and exchangeable bonds

Why do companies issue convertible bond loans? An empirical analysis for the Canadian market

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