The information content of a convertible debt offer announcement |
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Authors: | Charles J. Corrado Ajay Patel |
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Affiliation: | (1) University of Missouri, 214 Middlebush Hall, 65201 Columbia, MO;(2) Babcock School of Management, Wake Forest University, 27109 Winston-Salem, NC |
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Abstract: | 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. |
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Keywords: | convertible debt offer announcements issue and call decisions high and low conversion ratios |
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