Stock Price Response to Calls of Convertible Bonds: Still a Puzzle?

Abstract

The liquidity hypothesis predicts negative abnormal returns around the conversion‐forcing call announcements of convertible bonds, followed by a price recovery. We find the former but not the latter. The liquidity hypothesis also implies that the abnormal returns during the announcement and the post‐announcement periods should be related to proxies for the stock s liquidity. Again, our findings do not support these implications of the liquidity hypothesis. We conclude that the reason for the negative abnormal returns around the announcement of a conversion‐forcing call needs further examination.

What Drives the Issuance of Putable Convertibles: Risk‐Shifting, Asymmetric Information, or Taxes?

“…The large empirical literature about ordinary convertibles includes, among others, Dann and Mikkelson (1984), Billingsley and Smith (1996), Spiess and Affleck-Graves (1999), and Seward (1999, 2001). Our paper is also indirectly related to the theoretical and empirical literature concerning the information content of a firm's call policy regarding the ordinary convertibles it has issued (Harris and Raviv, 1985;Nyborg, 1995;Brick, Palmon, and Patro, 2007). 10 The rest of this paper is organized as follows.…”