The Performance of Firms that Issue Convertible Debt
Posted: 1 May 1998
Date Written: December 1997
Abstract
This paper examines post-issue operating performance, risk characteristics, and analyst forecasts to more fully understand issuer motivations for, and investor reactions to, the issuance of convertible debt. The main finding is that announcements of convertible debt offerings convey information about a firm's future operating performance and future risk changes. Issuer systematic risk declines, while unsystematic risk increases significantly in the post-offer period. Short-term and long-term measures of operating performance deteriorate. The former effect is caused by industry conditions, while the latter is issuer-specific. Finally, we find that analysts consistently overestimate issuer near-term earnings and long-term earnings growth rates. The results provide support for risk-shifting and adverse selection motives for the use of convertible debt.
JEL Classification: G32
Suggested Citation: Suggested Citation