FIRM PERFORMANCE AND SECURITY TYPE IN SEASONED OFFERINGS: AN EMPIRICAL EXAMINATION OF ALTERNATIVE SIGNALING MODELS

In this paper we examine the long-term performance of publicly traded firms that issue straight debt, convertible debt, or common stock. Declines in firm performance following issuance are consistent with declines in firm value at announcement and issuance, and suggest that convertible debt and common stock are substantially equivalent. This study is consistent with the pecking-order and Miller-Rock models, but inconsistent with the leverage-signaling model. Despite a significant decline following issuance, firms issuing common stock or convertible debt perform better, on average, than the industry before, at, and after issuance. This is consistent with younger, riskier, higher-growth firms being the predominant issuers of common stock and convertible debt.     

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.     

DEBT REFUNDING AND SHAREHOLDER WEALTH: THE PRICE EFFECTS OF DEBT-FOR-DEBT EXCHANGE OFFER ANNOUNCEMENTS

This study examines the impact of debt refunding on common stock prices for a sample of 48 exchange offers announced from 1970 through 1981. Exchange offer announcements do not have a significant impact on average common stock returns but appear to produce idiosyncratic share price effects. Refunding-induced price effects were unrelated to several exchange offer characteristics including tax shield increases, exchange offer premia, and transaction costs of refunding. Common stock excess returns were negatively related to reductions in debt service payments and relaxation of dividend payment constraints. Thus, the evidence is consistent with theories predicting that certain debt refundings generate negative information-signaling price effects.     

Bank acquisition of non-bank firms An empirical analysis of administrative decisions

This study uses stock price data to examine certain aspects of Federal Reserve Boards' administrative decisions regarding non-bank acquisitions by bank holding companies (BHCs). The results suggest that stockholders of BHCs whose acquisition plans were approved realized positive abnormal returns following the announcement of the acquisition of a non-bank firm. This result is consistent with the synergy interpretation of non-bank acquisitions by BHCs. Another finding is that stockholders of BHCs that were denied permission to acquire non-bank firms sustained significant losses during the five weeks following the Board's decision. These abnormal losses can be interpreted as foregone synergy rents or as a market reaction to the Board's signal that the BHC in question is excessively risky.     

The Impact of Capital Structure Change on Firm Value: Some Estimates

This study develops a model based on current corporate finance theories which explains stock returns associated with the announcement of issuer exchange offers. The major independent variables are changes in leverage multiplied by senior security claims outstanding and changes in debt tax shields. Parameter estimates are statistically significant and consistent in sign and relative magnitude with model predictions. Overall, 55 percent of the variance in stock announcement period returns is explained. The evidence is consistent with tax-based theories of optimal capital structure, a positive debt level information effect, and leverage-induced wealth transfers across security classes.     

ANNOUNCEMENT EFFECTS OF WITHDRAWN SECURITY OFFERINGS: EVIDENCE ON THE WEALTH REDISTRIBUTION HYPOTHESIS

This paper employs the comparison period returns approach to examine issuance and withdrawal announcement effects for stock portfolios of firms announcing equity or debt issues that are subsequently withdrawn. In contrast to previous literature, which generally attributes financing announcement effects to capital structure changes, the conclusion of this paper is that security price changes at the time an issue is announced or withdrawn prevent wealth redistributions between insiders and outsiders. Empirical findings are inconsistent with the interpretation of announcement effects as capital structure effects.     

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.     

Diversification and the cost of debt of bank holding companies

In this study, we investigate the relationship between various dimensions of diversification and the cost of debt for publicly traded bank holding companies (BHCs). We find that both domestic geographic diversification of deposits and diversification of assets lead to a lower bond yield-spread. Diversification of non-traditional banking activities leads to a lower cost of debt only when yield-spread and diversification are estimated simultaneously. In addition, we find that medium-sized BHCs experience a greater reduction in bond yield-spread than small-sized and large-sized BHCs. This is consistent with the too-big-to-fail (TBTF) effects in the banking industry. Furthermore, we document that the association between diversification and yield-spread is bidirectional with higher yield-spreads being associated with greater asset and activity diversification and lower geographic deposit dispersion. The effect of diversification on bond yield-spread is robust after accounting for cross-sectional and serial correlation, and the endogeneity of diversification.     

Common stock repurchases: An analysis of returns to bondholders and stockholders

This paper examines the effects of a common stock repurchase on the values of the repurchasing firm's common stock, debt and preferred stock, and attempts to identify the dominant factors underlying the observed value changes. The evidence indicates that significant increases in firm values occur within one day of a stock repurchase announcement. These value changes appear to be due principally to an information signal from the repurchasing firm. Common stockholders are the beneficiaries of virtually all of the value increments, but no class of securities examined declines in value as a result of the repurchase.     

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.     

Bank acquisition of mortgage firms and stockholders' wealth: An empirical analysis

This paper examines the behavior of the returns on the securities of bank holding companies (BHCs) acquiring mortgage firms after the announcement of such an acquisition and the release of the Federal Reserve Board's decision. The stockholders of acquiring BHCs do not realize abnormal returns following the announcement of the acquisition of a mortgage firm. This reconfirms previous findings in unregulated industries and is consisten with the hypothesis that any economic rent which is generated by such an acquisition is captured by the acquired mortgage firm: This implies that there exist BHCs — other than the acquiring one — that could also affect a profitable merger with the mortgage firm. Another finding is that stockholders of BHCs that were 3enied permission to acquire mortgage firms sustained significant losses during the five weeks following the Board's decision.     

The effects of capital structure change on security prices: A study of exchange offers

This study considers the impact of capital structure change announcements on security prices. Statistically significant price adjustments in firms' common stock, preferred stock and debt related to these announcements are documented and alternative causes for these price changes are examined. The evidence is consistent with both corporate tax and wealth redistribution effects. There is also evidence that firms make decisions which do not maximize stockholder wealth. In addition, a new approach to testing the significance of public announcements on security returns is presented.     

The information content of a convertible debt offer announcement

We develop a model of convertible debt financing that combines issue and call decisions into a common framework. The model suggests a role for refinancing costs in a manager's efforts to signal firm productivity to investors by an appropriate choice of debt issue terms. A cross section of convertible debt offers can be divided into two groups: a high conversion ratio group and a low conversion ratio group. The model predicts that high conversion ratios are negatively correlated with offer announcement stock returns and low conversion ratios are uncorrelated with offer announcement stock returns. The model is tested on a sample of 124 convertible debt offer announcements. Test results support model accuracy.     

The information content of a convertible debt offer announcement

We develop a model of convertible debt financing that combines issue and call decisions into a common framework. The model suggests a role for refinancing costs in a manager's efforts to signal firm productivity to investors by an appropriate choice of debt issue terms. A cross section of convertible debt offers can be divided into two groups: a high conversion ratio group and a low conversion ratio group. The model predicts that high conversion ratios are negatively correlated with offer announcement stock returns and low conversion ratios are uncorrelated with offer announcement stock returns. The model is tested on a sample of 124 convertible debt offer announcements. Test results support model accuracy.     

The Impact of Warrants and Convertible Securities on the Systematic Risk of Common Equity

This paper addresses the relationship between the capital structure and the systematic risk of common equity for a firm whose capital structure includes convertible securities. Adding warrants to the capital structure reduces the systematic risk of equity, which is consistent with the fact that warrants dampen the volatility of equity by reducing the upside potential gains of existing stockholders. Expressions showing the impact of conversion features in debt and preferred stock on the systematic risk of equity are derived, and contrasted with the systematic risk effects of non-convertible debt or non-convertible preferred stock financing. Failure to incorporate conversion features may lead to serious errors in assessing the impact of financing alternatives on the risk of equity.     

New considerations in the announcement effects of privately placed debt

We examine the stock price reaction to announcements of privately placed debt. The results suggest no effect for firms with a public debt rating and offsetting effects for firms without a public debt rating. If the private placement appears to reduce monitoring for a firm without a debt rating, it produces a significantly negative price response. However, if it appears to increase financial flexibility and bargaining power, it produces a positive reaction. Overall, the evidence suggests that private placements of debt are more similar to public bond issues than bank loans in terms of the price reaction at the announcement.     

DETERMINANTS OF VALUATION EFFECTS FOR SECURITY OFFERINGS OF COMMERCIAL BANK HOLDING COMPANIES

In this study, the impact of security issuance by bank holding companies is examined in light of two hypotheses: the regulation or asymmetry reduction hypothesis and the bank capital hypothesis. Announcements of the issuance of common stock are associated with a significant negative effect, and the magnitude of this effect is similar to that found previously for utilities and smaller than that found for industrial firms. The market does not appear to treat subordinated debt announcements as similar to equity, although the debt qualifies as “capital” for regulatory purposes. Cross-sectional regressions do not support asymmetric information models where all unexpected external announcements are viewed negatively. Rather, the type of security being issued is an important determinant of the announcement effect.     

Voting Rights and Market Reaction to Dual Class Common Stock Issues

This paper examines the return of the original class of common stock around the announcement of the creation of a second class of stock. As in previous studies, this one finds a generally ambiguous market reaction on the first public announcement. However, this paper offers new evidence that both the voting rights and the compensation for loss of voting rights are important determinants of the market's reaction. Specifically, it demonstrates that a second class stock issue that contains no compensation for the lost voting rights results in negative returns. When the original stockholders are compensated for lost voting rights, they experience positive abnormal returns.     

Value impact of debt issuances by targets of withdrawn takeovers

An existing finance theory predicts that managers of takeover targets will increase leverage to enhance managerial control which can, in turn, allow target managers to thwart a takeover attempt altogether. We find that targets significantly increase leverage, not only by issuing more debt, but also by repurchasing more equity. We also find that debt issuances by poorly performing target managers made between takeover announcement and withdrawal result in significantly negative abnormal returns at the time of the issuance, consistent with the entrenchment role of debt. On the other hand, debt issued by high-performing target managers is not found to result in these same negative returns. Additionally, we document that debt-increasing, poorly performing targets experience significantly more negative returns at withdrawal announcement, also followed by significantly negative post-withdrawal stock performance, while these negative effects are offset for high-performing targets. Overall, our findings suggest that managerial motivations to block takeover attempts with increased debt issuance differ and that these differences in motivation are recognized by the market.     

Open-Market Stock Repurchase and Stock Price Behavior When Management Values Real Investment

This paper provides a simple explanation of open‐market stock repurchases and the stock price behavior surrounding them. There is ex ante asymmetry of information with regard to the private benefits that corporate managers can attain from real investments. In our model, open‐market repurchase announcements reveal information about the managers' private benefits when real investment opportunities are unprofitable in terms of firm values. This study differs from previous studies in that we show that announcements of open‐market repurchase programs can be believable without the restriction that the announcements are commitments. Empirically, the model simultaneously predicts that a stock price will drop prior to an open‐market repurchase announcement and will rise in response to the announcement. These predictions are consistent with stylized facts.