New evidence on the announcement effect of convertible and exchangeable bonds

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. 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.

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

“…Abnormal returns measured over windows (À1, 0) and (0, 1) are also significantly negative. The negative shareholder wealth effect is consistent with most country-specific studies on Western European convertibles (Abhyankar and Dunning, 1999;Wolfe et al, 1999;Burlacu, 2000;Ammann et al, 2006).…”

A comparison of the stock market reactions of convertible bond offerings between financial and non-financial institutions: Do they differ?

“…In the metaanalysis of wealth effects of convertible bond offerings by Abdul Rahim, Goodacre, and Veld (2014), most studies in their samples either eliminate financial institutions because they have different considerations when choosing capital structure compared to non-financial institutions or include financial institutions without differentiating them from the nonfinancials. Studies in general have found that non-financials experience significant negative abnormal stock returns (e.g., Abhyankar & Dunning, 1999;Ammann, Fehr, & Seiz, 2006;Burlacu, 2000;De Jong et al, 2012;Duca, Dutordoir, Veld, & Verwijmeren, 2012;Murphy, Kleimain, & Nathan, 1997). The negative share price reaction has been commonly explained by theoretical models of asymmetric information as developed by Miller and Rock (1985) and of adverse selection as developed by Myers and Majluf (1984).…”

“…In the second specification, we further explore whether commercial banks have higher convertible bond announcement returns compared 13 Literature on the announcement effects of convertible bond that uses (0, 1) event window includes Abhyankar and Dunning (1999), Suchard (2007), and Ammann et al (2006), among others. 14 In unreported results, we have undertaken further robustness for example, when using alternative estimation window from −200 to −40 days, and event window (−1, 0).…”

The Announcement Effect of Exchangeable Bonds in China

“…Manuel Ammann, Martin Fehr, Ralf Seiz (2006) [12] research the data of exchangeable bonds and convertible bond from 1996 to 2003 in Switzerland and Germany.…”