Market undervaluation of risky convertible offerings: Evidence from the airline industry |
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Authors: | Vitaly S Guzhva Kseniya Beltsova Vladimir V Golubev |
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Institution: | (1) College of Business, Embry-Riddle Aeronautical University, 600 S. Clyde Morris Blvd., Daytona Beach, FL 32114-3900, USA |
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Abstract: | We assess market valuation of airline convertible preferred stocks using a contingent claims valuation model that was extensively
tested by Ramanlal et al. (Rev Quant Financ Account 10:303–319, 1998). Our sample consists of 4,096 daily price observations of 11 convertible preferred stocks issued by the U.S. airlines in
1980–1991. For each convertible we estimate daily model prices for 2 years after issuance and compare them with market prices
by calculating pricing errors. While the entire sample’s mean pricing error is found to be negative 3.8%, the panel data analysis
and the mean pricing errors of the sub-samples indicate that the undervaluation is much more severe in the first 6 months
of trading. The results suggest that airlines leave about 10% on the table when they raise capital by issuing convertible
securities. |
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