Stock Price Reactions To Debt Initial Public Offering Announcements

Abstract

We examine the valuation effect of initial public debt offers on issuing firms common stock for the period 1970 to 2010. In contrast to findings for seasoned debt offerings, we find a statistically significant cumulative abnormal return of -0.24 percent over the three-day announcement period for the overall sample of 1,207 debt IPOs. Consistent with the prediction of the adverse selection model of Myers and Majluf (1984), the significant negative valuation effect of debt IPOs is only associated with risky issues that are assigned a high-yield bond rating. The announcements of low-risk investment grade debt IPO issues are associated with insignificant positive stock price reaction. In addition to the certifying effect of investment grade rating, the market also reacts favorably to successful debt IPOs issued under challenging conditions.

Is it Worth Issuing Bonds in China? Evidence from Stock Market Reactions

“…Chang et al (2006) scrutinize stock market reaction around secured debt offerings and find a significant negative shareholder reaction. Cai and Lee (2013) confirm this result for the US stock market, performing a comprehensive study of the US bonds issues from 1970 to 2010. While they conclude in favor of a negative stock market reaction, their finding is only significant for speculative grade companies.…”

“…Empirical literature does not provide a clear consensus with some papers concluding to a positive reaction (Miller and Puthenpurackal, 2005;Fungacova, Godlewski and Weill, 2015) while others show a negative reaction (Chang et al, 2006, Cai andLee, 2013) or no significant reaction (Mikkelson and Partch, 1986;Eckbo, 1986). In any case, these papers deal with Western countries.…”

Bond offerings in China

“…Dann and Mikkelson (), Mikkelson and Megan Partch () and Eckbo () find a negative but insignificant reaction, Chang et al . () and Cai and Lee () found a negative and significant reaction, while Miller and Puthenpurackal (), Chang et al . () and Fungacova et al .…”

“…Empirically, shareholder reactions to a bond issue show no distinct pattern and seem to depend on which effect dominates. Dann and Mikkelson (1984), Mikkelson and Megan Partch (1986) and Eckbo (1986) find a negative but insignificant reaction, Chang et al (2006) and Cai and Lee (2013) found a negative and significant reaction, while Miller and Puthenpurackal (2005), Chang et al (2006) and Fungacova et al (2015) provide evidence of a positive valuation effect. We conclude from the empirical literature that no consensual finding has emerged for the stock market reaction following a bond issue.…”

The Reaction of Share Prices to the Announcements of Right Issues and Debenture Issues: Evidence from a Frontier Market

“…There's a rich diversity in findings on this matter. Positive market reaction to debenture issue announcements is emphasised by Brounen and Eichholtz (2001), Cai andLee (2013), andBayless &Chaplinsky (2014). Conversely, Dann andMikkelson (1984), Eckbo (1986), and Spiess & Affleck-Graves (1999) reported significant negative share price reactions.…”