Is a Convertible Bond Call Really Bad News?

Posted: 3 Aug 2001

See all articles by Louis H. Ederington

Louis H. Ederington

University of Oklahoma - Division of Finance

Jeremy Goh

Singapore Management University - Lee Kong Chian School of Business

Abstract

We test and reject the hypothesis that managers call in-the-money convertibles when they view a decline in the value of the firm as likely. Inconsistent with this view, we find that insiders generally buy equity before conversion-forcing calls. Also, analysts tend to raise their earnings forecasts following a call. Thus, our evidence supports the alternative hypothesis that the price decline immediately following conversion-forcing calls is a purely transitory decline caused by the anticipated increase in the supply of equity. Indeed, our evidence confirms that the initial price decline is reversed in the weeks following the announcement.

Suggested Citation

Ederington, Louis H. and Goh, Jeremy, Is a Convertible Bond Call Really Bad News?. Available at SSRN: https://ssrn.com/abstract=272813

Louis H. Ederington (Contact Author)

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States
405-325-5591 (Phone)
405-325-7688 (Fax)

Jeremy Goh

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

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