VALUATION OF PRIMARY ISSUE CONVERTIBLE BONDS

Little empirical evidence is available on the nature of the trade-offs between the debt- and equity-like components of convertible bonds. Such information would be useful to firms considering the issuance of convertible bonds. Furthermore, complete understanding of the leverage implications of convertible bond issuance depends on the market's view of the proportions of the implicit debt/equity mix. The current study develops a two-equation model that estimates the relative contributions made to the value of primary issue convertible bonds by the debt and implicit warrant components. The model's distinct approach affords an opportunity to evaluate the empirical relationship between the value of the implicit warrant and the theoretical determinants of that value by isolating the individual components of the convertible bond's value.     

RATIONAL TIMING OF CALLS OF CONVERTIBLE PREFERRED STOCKS

Conversion-forcing calls of convertible preferred stocks are re-examined focusing on the value of the conversion option impounded in the preferred price. This amount represents the preferred shareholder wealth potentially transferable to common stockholders. Capture of this wealth underlies the theoretical motivation for calling and forcing conversion as soon as possible. Most of the preferred issues examined exhibit nonpositive average option values throughout all but short periods; hence, no wealth transfer opportunity exists for immediate calls. Issues that exhibit positive option values are called quickly. In contrast to interpretations that have persisted for over fifteen years, our results reveal no substantial delays in calling convertible preferred stocks.     

THE VALUATION EFFECTS OF FREQUENT COMMON STOCK ISSUANCES

Previous empirical studies show that announcements of seasoned common stock registrations and issuances lead to significant reductions in common stock prices and shareholder wealth. Nevertheless, some firms issue common stock frequently. Our empirical study of nonutility firms that issued common stock four or more times within ten years shows that market reactions to announcements of offerings and to registrations are less unfavorable than typical reactions for infrequent issuers. A cross-sectional analysis reveals no unique characteristics that distinguish frequent issuers from one-time common equity issuers. In fact, the only detectable characteristic unique to the firms is that they issue common stock frequently.     

CONVERTIBLE BOND VALUATION: AN EMPIRICAL TEST

This research applies the options pricing model to the valuation of convertible bonds. A numeric algorithm is used to obtain theoretical values for a sample of 103 convertible bond issues. When market prices are compared with model valuations, the means are not significantly different, and 90 percent of model predictions are within 10 percent of market values. As a further test, the sample is divided on the basis of whether the model prices are (1) greater or (2) less than market prices. Returns are compared over a subsequent three-year holding period. The results indicate that without risk adjustment, the returns for the subsample identified by the model as “undervalued” (model prices exceed market prices) are significantly greater than returns for the subsample identified by the model as “overvalued” (market prices exceed model prices).     

THE ANALYTICS OF TAX EFFECTS IN DISCOUNT BOND VALUATION

This paper discusses the analytics of tax effects in discount bond valuation. The author illustrates that bond value is a simple linear function of the tax rate on interest income, whereas bond value is concave to the capital gains tax rate. The author also analyzes how changes in tax rates interact with yield changes to affect bond valuation and how tax rates interact with maturity to determine the depth of bond discount.     

MARKET EXPECTATIONS AND THE VALUATION EFFECTS OF EQUITY ISSUANCE

We examine how the wealth effects of equity offers are influenced by investors' expectation of the equity type (public or private) to be issued. Firms deviating to the public market may be issuing when information asymmetry or agency costs are high, and their wealth effects are more negative than for firms that are anticipated to issue equity publicly. Firms deviating to the private market, however, may signal firm undervaluation or monitoring benefits and experience more positive wealth effects than firms that are expected to issue equity privately. For the private issues, public market accessibility appears to influence the wealth effects.     

CONVERTIBLE SECURITIES: A TOLLBOX OF FLEXIBLE FINANCIAL INSTRUMENTS FOR CORPORATE ISSUERS

During the 1990s, convertible and equity-linked securities emerged as a major source of financing for U.S. corporate issuers. Issuance volume grew steadily throughout the decade and the secondary market value of U.S. convertible securities now exceeds $200 billion. In this overview of the market, the authors discuss the following: (1) the growth of issuance volume in the U.S. equity-linked market; (2) the basic characteristics of convertible securities; (3) convertible debt alternatives; and (4) convertible preferred alternatives.
As a result of the proliferation of new convertible structures, corporate issuers are now able to adjust coupon/dividend, conversion premium, and call protection in order to meet their tax, accounting, rating agency, and cost-of-capital objectives. Historically, the convertible new issue market has had a broad variety of issuers, spanning all industry sectors as well as both investment grade and high yield credits. But in the last two years, the most aggressive issuers have been technology-oriented companies, including telecommunications, Internet, hardware, software, and biotechnology concerns. Such technology-related issuers, which are often rated below investment grade and unable to secure straight debt capital, are generally in heavy-spending phases and view convertible bonds as a source of inexpensive financing. At the same time, investment-grade, "old-economy" issuers have continued to use convertible securities selectively, in most cases as cheap "quasi-equity" in the context of mergers and acquisitions, or as a tax-deferred strategy for selling cross-holdings of stock.     

SECURITIES PRICE EFFECTS OF UNIONIZATION LEGISLATION

Prior studies document that firms experience negative stock price effects in response to unionization. We study the economic effects of a radical change in unionization legislation in New Zealand and hypothesize that the stock price effect of unionization is a function of prior unionization status of firms. We provide evidence that legislative events that increase the likelihood of introducing more stringent legislation do not affect stock prices of high‐unionized firms, whereas low‐unionized firms are affected negatively and significantly. Legislative events that signal less stringent unionization legislation result in significant stock price increases for all firms.     

EQUITY VALUATION EFFECTS OF WARRANT-DEBT FINANCING

Stock price reactions to warrant-debt unit financing announcements are examined and a significant two-day average abnormal return of ?1.32 percent is found. The negative average abnormal return is similar to that observed for convertible debt financing announcements in previous research. Warrant-debt financing decisions result in large increases in capitalization; on average, issuers' long-term debt increases by 84 percent, and common shares outstanding increase by 18 percent assuming full exercise of the warrants.     

YIELDS ON CONVERTIBLE SECURITIES: 1969–1974

In the last five years many of the convertible securities, whose issue was an outstanding feature of company finance in the 1960s, have reached conversion opportunities. This paper reports the results of some simple tests of ex-post yields achieved on these securities from the date of issue to the last effective conversion opportunity. The results obtained are compared with the performance of the issuer's equity during the same period, and an attempt is made to evaluate convertibles as a form of investment with equity characteristics.
Au cours des cinq dernières années, la plupart des valeurs convertibles, dont l'émission tenait une place importante dans le financement des sociétés dans les années 1960, avaient atteint leur droit de conversion. Cet article donne les résultats de quelques tests simples s'appuyant sur les bénéfices ex-post effectués sur ces titres de la date d'émission à la dernière occasion possible de convertir. On a rapproché les résultats obtenus et la marche réalisée par le capital propre au cours de la même période. On s'appuie aussi à regarder les valeurs convertibles comme étant une forme d'investissement Pqssédant les caractéristiques du capital propre.
In den letzten fünf Jahren haven zahlreiche Wandelanleihen, deren Emission als merkwürdiges Kennzeichen der Finanzierung emissionsfähiger Atktiengesellschaften in den sechziger Jahren war, Wandelmöglichkeiten erreicht. Diese Abhandlung berichtet über die Ergebnisse einiger einfachen Teste der ex-post Renditen dieser Wertpapiere, von ihrer Emission bis zur letzten effektiven Wandelhglichkeit. Die abgeleiteten Ergebnisse werden mit den ex-post Aktienärsrenditen des Emittents für die selbe Periode verglichen. Es wird versucht, Wandelanleihen als Wertpapiere mit Aktienart zu bewerten.     

EQUITY VALUATION EFFECTS OF FORCED WARRANT EXERCISE

We examine stock price reactions to announced calls of in-the-money warrants and find a significant average devaluation in excess of 4 percent, consistent with the recent literature. We test theoretical predictions based on asymmetric information, agency costs, and corporate control in a cross-sectional model of announcement-period returns and find support for voting rights and ownership dilution as an explanation. We find evidence of some price recovery after the call announcement; however, further evidence of a liquidity-based explanation is mixed.