Why are conversion-forcing call announcements associated with negative wealth effectsα
We analyze call announcement returns taking into account two recent developments in the convertible bond market: the inclusion of dividend protection clauses in convertibles' terms, and the high fraction of convertible issues purchased by hedge funds. Calls of dividend-protected convertible bonds are predictable, yet we still observe a negative stock price reaction that cannot be explained by signaling. Greater hedge fund involvement prior to a call means less short selling in response to the call and we document a reduced price reaction. We conclude that price pressure and not signaling underlies the negative announcement effect of convertible bond calls.
|Keywords||Convertible call announcement effects, Dividend protection, Hedge funds, Price pressure, Signaling|
|Journal||Journal of Corporate Finance|
Grundy, B.D. (Bruce D.), Veld, C. (Chris), Verwijmeren, P. (Patrick), & Zabolotnyuk, Y. (2014). Why are conversion-forcing call announcements associated with negative wealth effectsα. Journal of Corporate Finance, 24, 149–157. doi:10.1016/j.jcorpfin.2013.10.003