Rational Timing of Calls of Convertible Preferred Stocks

Abstract

Conversion‐forcing calls of convertible preferred stocks are re‐examined focusing on the value of the conversion option impounded in the preferred price. This amount represents the preferred shareholder wealth potentially transferable to common stockholders. Capture of this wealth underlies the theoretical motivation for calling and forcing conversion as soon as possible. Most of the preferred issues examined exhibit nonpositive average option values throughout all but short periods; hence, no wealth transfer opportunity exists for immediate calls. Issues that exhibit positive option values are called quickly. In contrast to interpretations that have persisted for over fifteen years, our results reveal no substantial delays in calling convertible preferred stocks.