Changes in risk characteristics of firms issuing hybrid securities: case of convertible bonds

Abstract

The present paper examines changes in risk characteristics of a firm when it issues convertible bonds by studying the change in beta before and after the issuance of convertible bonds. Using a sample of 149 firms, strong evidence was found of change in beta, along with significant heterogeneity across firms. On average, the beta of a firm issuing convertible bonds declines, although 40 per cent of firms showed an increase in beta. A cross-sectional regression shows that after controlling for the reversion-to-mean phenomenon, the change in beta is significantly related to potential dilution of equity as well as to increase in debt, but is not significantly related to either the change in bond rating of a firm or to the stated use of funds from issuance. Copyright 2005 Accounting and Finance Association of Australia and New Zealand..

Risk dynamics surrounding the issuance of convertible bonds

“…Second, Rai (2005) studied changes in systematic risk following the issuance of convertible debt, and analyzed the main factors influencing the changes. His results emphasize that systematic risk declines on average subsequent to issuance.…”

Systematic risk variations (beta) convertible debenture brazilian companies

“…Regarding means of investigation, ex post facto research technique was employed, where it is operated on facts that already occurred in the past, over which no control whatsoever is exercised. Concerning the investigation of the company's systematic risk variation, the beta of leveraged companies, according to Rai (2005), under the assumption of non-existence of riskfree rates and assets, leveraged beta and non-averaged beta may be related by the equation 1:…”

“…Following the research method used by Rai (2005), in this research betas were obtained from the Ordinary Least Squares Method, through the Market Model, providing consistent estimates of main fixed parameters. Taking into account that non-stochastic regressors' assumption is clearly violated, only asymptomatic results can be proved.…”

“…Many studies (STEIN, 1992;LEWIS et al, 2002;MAYERS, 1998;RAI, 2005) According to Matos (2001), signaling becomes essential in a world with asymmetry of information, where participants look for signs that indicate to them the best decision to be made. If managers and shareholders purchase company shares, there may be value assigned to this action, which becomes a sign of good perspective for the company.…”

“…Additionally, the future conversion option would allow the manager to avoid additional issuing costs if the project were financed by stock issuing sequential or to avoid overinvestment if simple debentures had been issued in all stages of the project. Rai (2005) examined systematic risk variation of convertible debenture issuing companies by measuring beta variation. He found evidences that, around the convertible debenture issuing period, the systematic risk of studied companies underwent changes, it being that, on average, such changes were negative, although there was significant heterogeneity of results among companies (about 40% of the companies had increase in beta).…”