Do shareholders benefit from green bonds?

The green bond market has been growing rapidly worldwide since its debut in 2007. We present the first empirical study on the announcement returns and real effects of green bond issuance by firms in 28 countries during 2007–2017. After compiling a comprehensive international green bond dataset, we document that stock prices positively respond to green bond issuance. However, we do not find a consistently significant premium for green bonds, suggesting that the positive stock returns around green bond announcements are not fully driven by the lower cost of debt. Nevertheless, we show that institutional ownership, especially from domestic institutions, increases after the firm issues green bonds. Moreover, stock liquidity significantly improves upon the issuance of green bonds. Overall, our findings suggest that the firm's issuance of green bonds is beneficial to its existing shareholders.     

Convertible Bond Issues: Evidence from Security Markets

A convertible bond (CB) is a hybrid security containing elements of both common stock and straight debt. Still, empirical investigations on CB issue announcements have failed to discern any pattern in the stock market reaction that is consistent with announcements of either common equity or straight debt issues. This study shows that (a) motives for issuing the CB and (b) its rating (and to a less extent the riskiness of the issuing firm) help explain the stock market reaction to CB issue announcements. Specifically, announcement of a CB issue with an explicitly stated motive for the use of proceeds, when coupled with a high (low) bond rating, generates a stock market response similar to a straight debt (common stock) issue. On the other hand, the preference of CB holders is dictated by the motive for the use of proceeds and the conversion premium. These findings highlight the critical importance of the motive of issue in determining reactions in both the stock and bond markets.     

Convertible calls and corporate taxes under asymmetric information

This paper develops a signalling model of call of convertible securities (bonds or preferred stock) in the presence of corporate taxes and asymmetric information about future earnings. In equilibrium, managers with relatively unfavorable information call to force convertible holders to convert to common stock (in spite of the loss of corporate tax benefits if the convertibles are bonds), while those with relatively favorable information do not call. The model predicts that the announcement period common stock returns are more negative at the call of convertible bond than at the call of convertible preferred stock. Furthermore, we predict that when the importance of the tax deductibility of interest differs among firms, so does the stock price reaction to the announcement of convertible debt call. Specifically, the loss of equity value at the announcement decreases with the amount of non-debt tax shield that the calling firm owns, decreases with the book value of convertible debt called, and increases with corporate taxes.     

The Consequences of Issuing Convertible Bonds: Dilution and/or Financial Restructuring?

Historically, most convertible bond (CB) issues have been converted to equity sooner or later. The announcement of a CB issue will bring about a future dilution of the firm's capital, and is often followed by a drop in share price. However, a CB issue by itself creates future value for the shareholders if it enables the firm to make profitable investments. It can also issue a positive signal regarding the restructuring of the firm's financial liabilities and its attempts to optimise its financial structure. These positive effects, if they occur, will develop gradually after the issue, and cannot be identified by a simple short‐term event analysis of a CB issue announcement. In this paper, we test the significance of the dilution effect, coupled with a possible value creation effect, using data from the French stock market. We introduce a comparison between dilutive convertibles and non‐dilutive exchangeable bonds. By integrating different corrections and by selecting a window of analysis over a longer period after the announcement of the issue, we show that the negative cumulative average abnormal returns generally observed in previous studies become non‐significant. This absence of global incidence is indicative of large differences in individual behaviour by issuers of CBs, and leads us to take into account the strategic choices linked to the issue of a CB. Two goals, often described as ‘investment financing’ or ‘financial restructuring’, may exist when issuing, and may appear to explain the size of the abnormal returns.     

Product market advertising and corporate bonds

Research shows that by enhancing visibility, advertising improves stock liquidity and returns. Unlike stock holders, bond holders may view advertising skeptically. Without proven effectiveness in improving revenues, large pre-interest advertising expenditures can be seen as eroding a firm's ability to meet its debt service obligations. We find that although greater advertising by a firm improves liquidity of its bonds in the market, it does not lower the firm's cost of debt. However, firms with ineffective advertising experience reduced bond market liquidity and a higher cost of debt. Without a real positive economic impact, advertising has little or no value for bond investors.     

Odd‐lot Costs and Taxation Influences on Stock Dividend Ex‐dates

Abstract:   Past research has revealed significant abnormal ex‐date returns for stock dividends even though the ex‐date is known in advance and the distribution contains no new information. Various researchers have suggested that the higher transaction cost of selling odd‐lot share parcels compared to round‐lot share parcels is a key driver in the abnormal returns. However, no study to date has directly compared the ex‐date price reaction of stock dividends distributed when odd‐lot transaction costs were charged to those issued when odd‐lot costs were not evident. As odd‐lot trade costs were eliminated from the New Zealand Stock Exchange on 1 October, 1991, the New Zealand market provides a unique opportunity to directly test the role, if any, that odd‐lot transactions costs have in explaining stock dividend ex‐date returns. We find that prior to October 1991 stock dividend ex‐dates exhibit significantly positive returns, however, we do not find any significant ex‐date return once the higher odd‐lot transaction costs were removed. The New Zealand market also enables us to examine an imputation tax based argument of the ex‐date price reaction and we find evidence that imputation tax credits have a value greater than zero.     

The Risk Microstructure of Corporate Bonds: A Case Study from the German Corporate Bond Market

This article presents joint econometric analysis of interest rate risk, issuer‐specific risk (credit risk) and bond‐specific risk (liquidity risk) in a reduced‐form framework. We estimate issuer‐specific and bond‐specific risk from corporate bond data in the German market. We find that bond‐specific risk plays a crucial role in the pricing of corporate bonds. We observe substantial differences between different bonds with respect to the relative influence of issuer‐specific vs. bond‐specific spread on the level and the volatility of the total spread. Issuer‐specific risk exhibits strong autocorrelation and a strong impact of weekday effects, the level of the risk‐free term structure and the debt to value ratio. Moreover, we can observe some impact of the stock market volatility, the respective stock's return and the distance to default. For the bond‐specific risk we find strong autocorrelation, some impact of the stock market index, the stock market volatility, weekday effects and monthly effects as well as a very weak impact of the risk‐free term structure and the specific stock's return. Altogether, the determinants of the spread components vary strongly between different bonds/issuers.     

Convertible debt issuance,capital structure change and financing-related information: Some new evidence

This paper provides evidence on the valuation effects of convertible debt issuance. Common stockholders earn significant negative abnormal returns at the initial announcement of a convertible debt offering, and also at the issuance date. In contrast, the average valuation effect on common stock at the announcement of non-convertible debt offerings is only marginally negative, and is zero at issuance. The significant negative average effect on common stock value appears not to be systematically related to either the degree of leverage change induced by the convertible debt issuance or the extent to which the proceeds from issuance are used for new investment or to refinance existing debt. If, as appears likely, the issuance of convertible debt on average increases financial leverage, these results are inconsistent with evidence from other recent studies documenting common stock price effects of the same sign as the change in leverage. The evidence suggests that convertible debt offerings convey unfavorable information about the issuing firms, but the specific nature of such information remains unidentified.     

Requiem for a Market Maker: The Case of Drexel Burnham Lambert and Junk Bonds

This article adds to both the financial intermediation and market microstructure literature by examining the market reactions surrounding the withdrawal of a major financial intermediary and market maker from a specific securities market. We examine the exit of Drexel Burnham Lambert (Drexel) from the junk bond market in 1990. At the time Drexel exited the market by declaring bankruptcy, it was the dominant market maker and underwriter of junk bonds. We examine the impact of Drexel's failure on direct and indirect holders of junk bonds by investigating the effect of Drexel's collapse on junk bond returns, and on the stock returns of a group of firms that, on average, held significant amounts of junk bonds. We find that the collapse of Drexel had a significant impact on junk bond prices in general, and a greater impact on the prices of lower-quality junk bonds in particular. We interpret this result to imply that the value of the liquidity services supplied by Drexel was higher for lower-quality junk bonds. Additionally, we find that junk bonds underwritten by Drexel, as opposed to other investment banks, experienced a significant decline in price over the months leading up to Drexel's failure announcement. This suggests that the monitoring services provided by Drexel for the bonds it underwrote would not be replaced easily by other financial intermediaries operating in the junk bond market. Our results also indicate that the stock returns of life insurance companies with relatively high junk bond exposure tended to be affected more negatively by Drexel's financial distress than the stock returns of life insurance companies with relatively low junk bond exposure.     

Wealth effects of convertible bond and convertible preference share issues: An empirical analysis of the UK market

We examine the wealth effects of the announcement of issues of different types of convertible securities by UK firms and find significant negative effects on shareholder wealth. We however, also find that when the sample is partitioned by method of issue, privately placed convertible bonds, in contrast to previous research, exhibit a negative impact on firm wealth. Further, we also find negative wealth effects for firms that issue convertible securities to refinance previous debt or finance specific acquisitions. However announcements of convertible bond issues, for the purpose of financing capital expenditure schemes, show significant positive wealth effects. Finally, we find mixed support for testable predictions of the main theoretical models relating cross-sectional firm characteristics of convertible bond issuers to abnormal returns.     

Top management incentives and financial flexibility: The case of make‐whole call provisions

Consistent with the premise that make‐whole call provisions enhance value‐creating financial flexibility, we find that higher sensitivity of managerial wealth to stock price (delta) increases the likelihood that corporate bonds contain make‐whole provisions. Building on the results of related research, post‐issue financial performance of make‐whole callable bond issuers increases in delta. In line with prior findings that demonstrate financial flexibility can be costly to bondholders, we find that managerial equity incentives impact the incremental effect of make‐whole provisions on the pricing of corporate debt securities. Consistent with the flexibility explanation, we also find that the market response as measured by abnormal trading volume to the issuance of make‐whole callable debt varies in equity incentives. Overall, our results suggest that managerial incentives play a role in the choice, pricing, and market response to make‐whole options in corporate debt securities.     

Short‐selling pressure and last‐resort debt finance: evidence from 144A high‐yield risk‐adjusted debt

This study examines why non‐financial publicly traded firms knowingly issue wealth destroying Rule 144A debt, which is associated with a negative announcement return and a higher yield. We provide a plausible ‘demand‐side’ explanation (i.e. last‐resort debt financing) for the motivation for issuing such debt. We also provide evidence as to what drives this negative reaction. Our findings suggest that the negative market impact is mainly driven by short‐selling pressure from convertible bond arbitrageurs.     

UNITS OF DEBT WITH WARRANTS: EVIDENCE OF THE “PENALTY-FREE” ISSUANCE OF AN EQUITY-LIKE SECURITY

While units of debt with warrants are not structured as perfect substitutes for convertible bonds, there is reason to believe that firms view the two securities as viable alternative methods of raising funds. Analyses of the capital market effects of the announcement of the plan to issue and the issuance of units of debt with warrants provide unique evidence of the “penalty-free” issuance of an equity-like security. Evidence is found to support the conjecture that units are typically issued by smaller, riskier firms than are convertible bonds. However, there is no evidence that the use of this security is interpreted by the market as a sign of financial distress.     

Quantify the quantitative easing: Impact on bonds and corporate debt issuance

This paper studies the impact of the European Central Bank’s (ECB) Corporate Sector Purchase Programme (CSPP) announcement on prices, liquidity, and debt issuance in the European corporate bond market using a data set on bond transactions from Euroclear. I find that the quantitative easing (QE) programme increased prices and liquidity of bonds eligible to be purchased substantially. Bond yields dropped on average by 30 basis points (bps) (8%) after the CSPP announcement. Tri-party repo turnover rose by 8.15 million USD (29%), and bilateral turnover went up by 7.05 million USD (72%). Bid-ask spreads also showed significant liquidity improvement in eligible bonds. QE was successful in boosting corporate debt issuance. Firms issued 2.19 billion EUR (25%) more in QE-eligible debt after the CSPP announcement, compared to other types of debt. Surprisingly, corporates used the attracted funds mostly to increase dividends. These effects were more pronounced for longer-maturity, lower-rated bonds, and for more credit-constrained, lower-rated firms.     

Preferred stock: Some insights into capital structure

This study analyzes the reactions of equity holders and bondholders to the announcement of 427 preferred stock issues. We document an average equity announcement effect of − 0.65%. This reaction is positively influenced by a number of measures of firm creditworthiness and transparency and is higher for bank issuers. The equity market reaction is negatively influenced by convertibility (and the moneyness of the embedded option) and by the firm's accounting treatment of the issue (specifically if the issue is classified as equity). We find that average credit default swap spreads decrease by 50 basis points after the issue announcement. This decrease is also larger for more creditworthy and transparent firms. Convertibility and the moneyness of the embedded option further decrease the CDS spread. In aggregate, the decrease in equity value is much smaller than the increase in the value of the issuer's debt.     

Too transparent for signalling? A global analysis of bond issues by property companies

Bond issues often result in negative revaluations of the market value of equity. These market reactions are usually explained by negative signals and asymmetric information about the use of the proceeds. In industries with rather transparent investment opportunities these arguments are not applicable and we expect to find no negative revaluations. Consequently, analysing the stock price reactions to 2299 bond issues by real estate companies between 1996 and 2019, we observe none to positive reactions on the announcement of an upcoming bond issue. The findings underpin the necessity for controlling of industry effects in empirical studies on capital structure decisions.     

Partial anticipation, the flow of information and the economic impact of corporate debt sales

Corporate debt sales have been regarded as 'no news' eventsbecause there is no significant price reaction on average totheir announcement. We explore the hypothesis that this lackof average price reaction to debt sale announcements is explainedby the partial anticipation of debt offers. Theory suggeststhat the demand for debt capital is fundamentally related tochanges in the sources and uses of funds, and we find evidencethat earnings are significantly lower, investment growth issignificantly bigger, and, for some issuers, debt refundingrequirements are significantly greater in the period immediatelyprior to issue than in periods well before and after the issue.We find that this preissue information conditions investors'expectations of issue, thereby affecting the cross-sectionalannouncement date price reaction to debt sales in two ways.First, announcement date price reactions are negative, on average,for unanticipated offers or for those offers where prior informationsuggests that an issue is unlikely. Second, holding the probabilityof issue constant, announcement date price reactions are significantlymore negative for offers that raise more capital than investorsexpected. These results are consistent with cash flow signalingand asymmetric information models of corporate financings.     

The market timing of corporate bond reopenings

The objective of this paper is to test whether companies use corporate bond reopenings to exploit overvalued debt. Reopenings represent new debt offerings, which are characterized through identical configurations as an already outstanding bond, but with a market-adjusted price. Their advantage lies with the fact that fewer preparations are required compared to a new regular offering. For a set of European companies our results suggest that stockholders respond less positively to the announcements of reopenings than to regular offerings. This effect is stronger, the higher the pre-issue bond price run-up, and the stock price reaction is directly linked to the change in the firm’s debt value. Additionally, the prices of the reopened bonds drop on the announcement day. Therefore, in line with the window of opportunity theory, the firm’s management appears to use reopenings as a fast and inexpensive way to raise debt capital, which leads stockholders and bondholders to suspect an overvaluation and therefore to adjust their price expectations. The analysis also reveals that the redistribution of wealth from bondholders to stockholders is a major determinant for the observed price changes.     

MARKET EFFECTS OF CHANGES IN THE STANDARD & POOR'S 500 INDEX

This paper examines the impact on stock returns of changes in the Standard & Poor's (S&P) 500 index. S&P states that firms are not added to or deleted from the index for valuation reasons but rather to maintain or improve the index's representative character. Results from market response tests indicate that stocks added to (deleted from) the index since 1975 experience a significant positive (negative) announcement day excess return. No announcement effect occurs in S&P changes prior to 1976. These announcement effects may be explained by a price-pressure hypothesis or by an information effect. Results of tests conducted to isolate which of these phenomena is present are reported.