Abhyankar & Dunning

Journal of Banking & Finance 23 (1999) 1043±1065
www.elsevier.com/locate/econbase
Wealth eects of convertible bond and

convertible preference share issues: An
empirical analysis of the UK market
a,* b
Abhay Abhyankar , Alison Dunning
a
Warwick Business School, University of Warwick, Coventry CV4 7AL, UK
b
Guardian Asset Management, 155 BishopÕs Gate, London EC2M 3UU, UK
Received 30 April 1997; accepted 8 October 1998
Abstract
We examine the wealth eects of the announcement of issues of dierent types of

convertible securities by UK ®rms and ®nd signi®cant negative eects on shareholder
wealth. We however, also ®nd that when the sample is partitioned by method of issue,
privately placed convertible bonds, in contrast to previous research, exhibit a negative
impact on ®rm wealth. Further, we also ®nd negative wealth eects for ®rms that issue
convertible securities to re®nance previous debt or ®nance speci®c acquisitions. How-
ever announcements of convertible bond issues, for the purpose of ®nancing capital
expenditure schemes, show signi®cant positive wealth eects. Finally, we ®nd mixed
support for testable predictions of the main theoretical models relating cross-sectional
®rm characteristics of convertible bond issuers to abnormal returns. Ó 1999 Published
by Elsevier Science B.V. All rights reserved.
JEL classi®cation: G0; G1; G3
Keywords: Convertible securities; Convertible preferred stock; Convertible capital

bonds; Shareholder wealth; UK ®rms
*
Corresponding author. Tel.: +44-1203-522842; fax: +44-1203-523779;
e-mail: a®naa@wbs.warwick.ac.uk
0378-4266/99/$ ± see front matter Ó 1999 Published by Elsevier Science B.V. All rights reserved.
PII: S 0 3 7 8 - 4 2 6 6 ( 9 9 ) 0 0 0 0 2 - 3
1044 A. Abhyankar, A. Dunning / Journal of Banking & Finance 23 (1999) 1043±1065
1. Introduction
The shareholder wealth eects of security oerings by ®rms have been

extensively examined in the ®nance literature. The empirical evidence suggests
that pure equity oers have a relatively large negative eect while issues of
straight debt have a small non-negative eect on the value of the issuing ®rm.
Oers for sale of convertible securities, which combine characteristics of both
debt and equity, have negative wealth eects that lie between those observed
for pure equity and straight debt. Research in this area is important for
several reasons. First, ®nancial economists have been greatly intrigued by the
®nding, documented in a number of studies, that ®rm value falls by about 3%
on average with the announcement of the issue of leverage decreasing secu-
rities. Several theoretical models have sought to explain this stylised fact. It is
therefore important to examine the size and sign of this eect, for hybrid
debt±equity securities, in varied institutional and regulatory settings.
Secondly, it is of considerable practical relevance to managers, who are
required to take decisions about the special features of convertible issues, to
understand the eects on ®rm wealth of speci®c choices of convertible
securities.
The main contributions of this article are as follows. First, based on a new
data set of convertible securities issued between 1986 and 1996 by UK ®rms, we
examine the wealth eects of the announcement of issues of three dierent
types of convertible securities; convertible bonds, convertible preference shares
and convertible capital bonds. Previous research has concentrated on con-
vertible bonds but relatively little attention has been directed towards other
types of convertible securities. Secondly, the study provides evidence on the
wealth eects of alternate methods as well as dierent stated purposes of
convertible issues. In addition, it also examines the dierential impact of
convertible issues made in the domestic UK and the Euro-convertible markets;
an aspect of practical relevance to managers and regulators. Finally, it also
tests the predictions of dierent theoretical models, relating announcement
period abnormal returns and cross-sectional ®rm characteristics of convertible
security issuers.
Our results suggest the following. First, announcements of the issue of
convertible bonds, convertible preference shares and convertible capital bonds
all have signi®cant negative eects on shareholder wealth. The average negative
eect for UK convertible bonds and preference share issues is however about
half that found in prior research on US ®rms. Convertible capital bonds, the
most `èquity-like'' of the three securities in our sample, show the largest and
most negative reaction. Second, we ®nd that there is a negative announcement
period eect for convertible bonds and convertible preference shares regardless
of the speci®c method of issue used. In particular, we ®nd a negative eect for
privately placed convertible bond issues which contrasts with the positive
A. Abhyankar, A. Dunning / Journal of Banking & Finance 23 (1999) 1043±1065 1045
reaction observed in the case of for privately placed equity issues. 1 Third, we
®nd that there are negative wealth eects for convertible bond or ®nance
speci®c acquisitions or for mixed ®nancing uses. However, ®rms issuing con-
vertible bonds to ®nance capital expenditure schemes exhibit a signi®cant
positive wealth eect. Finally, we ®nd only mixed support for testable pre-
dictions of competing theoretical models relating cross-sectional ®rm charac-
teristics of convertible bond issuers to abnormal returns.
The paper is organised as follows. In Section 2, we brie¯y review the main
theoretical models and provide, in Section 3, an overview of prior empirical
®ndings. The data set and the methodology are described in Section 4. Section 5
provides details of the empirical results and Section 6 concludes the paper.
2. Review of the theoretical background
The main focus of this paper is to analyse the eect on the underlying stock
prices of ®rms which announce they plan to issue convertible securities and to
identify the cross-sectional determinants of announcement period abnormal
returns. We therefore ®rst provide a description of the three types of con-
vertible securities in our sample; convertible bonds, convertible preferred stock
and convertible capital bonds. Next, we brie¯y describe the theoretical models
relating announcement of leverage changes by ®rms and their impact on
shareholder wealth.
Convertible bonds are securities, which have the characteristics of debt as
well as equity. A convertible bond 2 oers the holder an option to convert it
into a ®xed amount of equity (as set by the conversion price) at some time in
the future. Generally, when the underlying equity price exceeds the conversion
price, and the embedded call option is `ìn the money'' and the convertible
bond can be viewed as a form of quasi-equity. Like convertible bonds, con-
vertible preferred stock can also be viewed as a package of a call option on the
underlying equity and a straight preference share. Preferred stock holders get a
®xed dividend but unlike bondholders, are not creditors of the company and
therefore rank higher than unsecured bondholders in the event of bankruptcy.
Our data set also contains a small number of convertible capital bond an-
nouncements made by UK ®rms during the sample period. Convertible capital
bonds are issued by a subsidiary within a group of companies and are ex-
changeable for ordinary shares in the issuerÕs parent company. They are dis-
tinct from common convertible bonds in that they have a mandatory feature
1
See, for example, Wruck (1989).
2
McInnes et al. (1994) provide a discussion of accounting issues related to UK convertible
securities.
that compels the holders to exchange their bonds into preference shares in the
issuer before any redemption or conversion takes place. If the holder of the
bonds chooses to convert, the bonds ®rst convert into (usually) redeemable
preference shares in the issuer which are then exchanged for ordinary shares in
the parent at a speci®ed exchange price(s) at pre-determined times in the fu-
ture. 3 It is interesting to note that convertible capital bonds were treated in
UK accounting practice as equity by some UK companies (see McInnes et al.
(1994) for details) till the adoption of a new accounting standard 4 by UK
accounting regulators which required convertible capital bonds to be classi®ed
as debt.
2.1. Theoretical models of determinants of announcement period abnormal

returns associated with convertible debt issues
Several theoretical models 5 related to the motivation for issuing of con-

vertible securities, their pricing and wealth eects on issuers have been put
forward in the literature. Of particular interest to the current study, are the
models of Brennan and Kraus (1987), Brennan and Schwartz (1988), Green
(1984) and Stein (1992).
Brennan and Schwartz (1988) and Brennan and Kraus (1987) propose a
model, which explains a ®rmÕs choice of ®nancing instruments when investors
and management disagree about the riskiness of the company. Two main
testable implications follow from their arguments. First, their model predicts
that it is the smaller, riskier high growth ®rms which will be most likely issuers
of convertible debt; speci®cally they predict a negative relation between an-
nouncement period prediction errors and ®rm size and credit rating. Secondly,
their model also predicts that the maturity of a convertible bond is positively
related to the announcement period abnormal return. Green (1984) focuses on
the bondholder±shareholder agency con¯ict arising from, for example, the
underinvestment problem (see Myers, 1977). In this case, with risky debt
outstanding bondholders and shareholders may disagree over the optimal ex-
ercise of the ®rmÕs investment growth opportunities. Also, longer term debt
involves greater risk of a shift in corporate investment policies and exacerbates
the underinvestment problem. One approach to controlling this investment
incentive problem is to shorten the eective maturity of the debt. Thus, the
3
See Marshall (1995) for details regarding convertible capital bonds.
4
UK Financial Reporting Standard (FRS) 4 `Àccounting for Capital Instruments'' (UK
Accounting Standards Board, 1993).
5
Such models also provide testable hypotheses related to design aspects of convertible securities;
for example issues related to call structure (Barnea et al., 1980) and issues related to the maturity
structure (Flannery, 1986; Diamond, 1993; Myers, 1977).
inclusion of a conversion option in longer term debt may be necessary to

``compensate'' investors for the possibility of subsequent changes in the ®rmÕs
investment decisions. Green (1984) further suggests that fast growing ®rms that
raise capital to exercise growth options may elect to issue shorter term con-
vertibles to mitigate the underinvestment problem. GreenÕs analysis of the asset
substitution problem also provides explicit predictions about how managers
should design convertible bonds to mitigate adverse investment incentives.
Speci®cally it suggests that the post-conversion equity ownership allocated to
convertible bondholders will be positively related to the ®rmÕs debt ratio and
inversely related to the issueÕs credit rating, the conversion premium and ®rm
size.
Stein (1992) suggests that ®rms may issue convertible securities as an indi-
rect method to increase the equity in their capital structures thereby reducing
the adverse selection costs associated with pure equity issues. The model pre-
dicts that announcement period abnormal returns should be related positively
to ®rm-speci®c proxies for costly ®nancial distress. The second testable im-
plication ¯ows from the prediction that, if a company has substantial ®nancial
leverage, it will choose convertible debt only if it is relatively optimistic about
its future stock price. Thus a positive relationship would be expected between
the announcement period abnormal return and the ®rmÕs ®nancial leverage
position. Finally, Stein (1992) also suggests that empirically one might expect
to ®nd a negative relationship between the announcement period abnormal
returns and the length of the call period protection.
2.2. Theoretical models of the valuation impact of security issues in general
A number of models (see Harris and Raviv (1991) and Masulis (1988) for
excellent reviews) seek to explain the impact on ®rm value of the issue of new
securities. These models are based on (1) optimal capital structure eects, (2)
asymmetric information and implied cash ¯ow and (3) adverse selection ef-
fects.
2.2.1. Optimal capital structure eects

Models based on the idea of an optimal structure emphasise trade-os be-
tween debt and equity; the corporate tax advantage of debt versus the costs of
®nancial distress (Kraus and Litzenberger, 1973; Brennan and Schwartz, 1988);
the personal tax disadvantage of debt and the impact of excess corporate tax
deductions on the corporate tax advantage of debt (Miller, 1977; DeAngelo
and Masulis, 1980); and the agency costs of debt and equity (Jensen and
Meckling, 1976; Myers, 1977). Theories of optimal capital structure generally
imply a non-negative market reaction to capital structure changes. The evi-
dence of a negative market reaction to the announcements of both debt and
equity however fails to support these models.
2.2.2. Asymmetric information and cash ¯ow eects

In this class of models, it is assumed that managers have better information
than outsiders about the ®rmÕs value. Miller and Rock (1985), for example,
suggest that any unexpected outside ®nancing conveys negative information
about the ®rmÕs prospects. Since the issue size reveals the extent of the diver-
gence between the actual and expected internally generated cash ¯ows, the
larger the unexpected funding the larger is the decline in value.
2.2.3. Adverse selection eects

Myers and Majluf (1984) develop a model in which external ®nancing has a
negative eect on common stock prices. They suggest that if managers believe
the companyÕs common stock is overvalued, they have incentives to issue new
stock and to undertake zero (or even negative) net present value projects with
the proceeds, since current shareholders will bene®t directly from the wealth
transfer. Since the market understands this incentive, announcements of new
security issues are received with scepticism. Further, the riskier the security to
be issued, the more sceptical the reception. Consequently, when raising external
funds, managers are induced to issue securities in ascending order of risk (or in
a ``pecking order'') to preserve the wealth of current common stockholders.
The empirical evidence is largely consistent with this adverse selection frame-
work.
Smith (1986) provides a synthesis of the arguments underpinning these
theoretical models and asserts that the eect of new ®nancing may be positive,
neutral or negative, depending on how the implied changes in cash ¯ow interact
with the changes in leverage implied by the type of security issued. For ex-
ample, a straight preferred issue that simultaneously reveals a cash ¯ow de®cit
and an increase in leverage may have little or no impact on the ®rmÕs common
stock price; the positive information inferred from the leverage increase would
oset the negative information of the cash ¯ow shortage. The net eect of a
convertible preference shares issue is more complex; the unexpected need for
external funds is still negative information but the leverage change is more
dicult to interpret. It could be argued that current leverage is increased be-
cause of the preferred issue, but on the other hand one could argue that future
leverage change is reduced because of the expected future conversion. It needs
to be noted here that whereas theories regarding convertible debt are plentiful,
there is little theoretical work 6 on the eects of convertible preference shares
issues.
6
Linn and Pinegar (1988) assume, for example, that models about convertible bonds are
applicable to convertible preference shares issues; the implicit assumption being that the two are
regarded as substitutes.
3. Review of prior empirical evidence
We provide in Table 1, based largely on the detailed information in Eckbo

and Masulis (1995) and supplemented by more recent references, a summary
of relevant prior empirical work on convertible bonds and convertible pre-
ferred stock. The evidence suggests that the impact on ®rm value associated
with convertible security announcements lies between that shown by pure
equity and straight debt. Dann and Mikkelson (1984), Eckbo (1986) and
Mikkelson and Partch (1986), in early work, observe a negative impact close
to the average of about 2% found in earlier work. Fields and Mais (1991), on
Table 1
Summary of the results of previousa empirical research
Security study Period Sample size Resultb Method of issue
Convertible bonds (US)
Dann and Mikkelson (1984) 1970±1979 132 ÿ2.3 FC
38 ÿ1.2 R
Eckbo (1986) 1964±1981 53 ÿ1.9 FC
14 ÿ0.8ns R
Mikkelson and Partch (1986) 1972±1982 33 ÿ2.0 FC
Janjigian (1987) 1968±1983 234 ÿ1.7 FC
Hansen and Crutchley (1990) 1975±1982 67 ÿ1.5 FC
Long and Sefcik (1990) 1965±1984 134 ÿ0.61 N
Billingsley et al. (1990) 1971±1986 104 ÿ2.04 N
Fields and Mais (1991) 1970±1987 61 +1.80 PP
Kim and Stulz (1992) 1965±1987 132c ÿ2.3ns PP
34d ÿ1.40
Davidson et al. (1993) 1980±1985 146 ÿ1.44 N
Convertible (non-US)
Kang et al. (1995) 1977±1989 83 ÿ0.224ns N
De Roon and Veld (1995) 1976±1994 146 ÿ0.0144 N
Kang and Stulz (1996) 1985±1991 561 +0.83 PP
Convertible preferred stock
Linn and Pinegar (1988) 1962±1984 59 ÿ2.015 PP
Davidson et al. (1993) 1980±1985 36 ÿ0.0245 N
a
This table is based on Table 11 in Eckbo and Masulis (1995). It also has results of some other
relevant studies not reported there. Also the results reported are restricted to industrial ®rms for
further details please Eckbo and Masulis (1995).
b
Results are average announcement period preadiction error (in percentage) weighted by sample
size. All results reported are signi®cant at the 5% level except where indicated as not signi®cant (ns).
Method of Flotation is indicated as follows: FC is ®rm commitment, SR is standy rights, R is
rights, PP is public placement and Pvt.P is by private placement, N means placement method not
reported.
c
Convertible bonds issued prior to 1984.
d
Convertible bonds issued after 1984.
the other hand, ®nd that privately placed convertible issues 7 have a positive
(+1.80%) and signi®cant impact on ®rm value. Davidson et al. (1993) also
report ®nd that convertible preference shares have a signi®cant negative eect
(ÿ2.45%) which is more negative than that for convertible bonds (ÿ1.44%).
Kim and Stulz (1992) report that prior to 1984, the stock price reaction to
announcements of convertible issues in the domestic market is negative, while
the reaction to Eurobond issues by US ®rms was smaller in absolute value
and not consistently negative. After 1984, they observe that the reaction to
announcements of a convertible issue is the same for domestic and oshore
issues, suggesting greater integration between the domestic and oshore
markets.
It is clear from Table 1 that much of the research work has concentrated on
the US market. Relatively less attention has been paid to the eects of issue of
convertible securities other than convertible bonds as well as security issues in
non-US markets, except perhaps with the exception of Japan. Kang and Stulz
(1996), for example, study a large sample of common stock issues as well as
straight, convertible and warrant bonds in Japan. They ®nd that the reaction to
convertible bond issues is signi®cantly positive for the announcement period
and identify a smaller, but similar, reaction on the issue date. They conclude
that the dierences between their results and those for US ®rms could only be
partly attributed to institutional features including deregulation and the spe-
ci®c aspects of Japanese corporate forms. De Roon and Veld (1995) also an-
alyse the eects of convertible versus warrant bond loans in the Dutch market
and observe a positive reaction to both issues.
4. Data and methodology
4.1. Data description
The sample of convertible security issues used in this study was constructed
as follows. First, data was collected, from various London Stock Exchange
publications and the Financial Times-Extel service, on all issues between 1982
and 1996. This resulted in an initial sample of 898 convertible issues. This raw
sample was then screened to exclude issues on one or more of the following
grounds: company not listed on the London Stock Exchange at issue, non-
sterling issues, exchange oers, issues with warrant bonds, issues by ®nancial
companies, issues bundled with announcements of other types of securities and
7
Wruck (1989) ®nds a positive and signi®cant increase in shareholder wealth after announce-
ments of private placements of equity issues by US ®rms, sharply contrasting with the fall observed
in public equity issues.
cases where a company had made more than one issue within 5 years of the ®rst
one. In addition, issues involving conversion into deferred stock and those that
provided conversion into the shares of a subsidiary company were deleted.
Application of these screens resulted in an initial sample of 261 convertible
issues over the years 1982±1996.
The next step was to obtain the announcement date of the issuance of the
convertible securities included in the sample. Most US studies 8 of the eects of
the announcement of capital structure events on share prices de®ne the Ôan-
nouncement dateÕ as the date on which the event is reported in a ®nancial
publication such as the Wall Street Journal. In the UK, listed companies are
required, under the rules of the London Stock Exchange, to provide all ma-
terial price-sensitive information ®rst to the Company Announcements Oce
through whom it is then released to the market. We exploit this institutional
feature to extract the exact date of public release of the issue 9 from the
Company AnnouncementÕs Oce micro®che for the period 1982±1992. An-
nouncement dates for issues after 1992 were obtained the Financial Times-
Extel ``Company and Financial Research'' database. We de®ne the
announcement date as the date on which the security issuance is stamped 10 as
being released to the market by the Company Announcements Oce.
Many studies in the literature report results with both ``clean'' and ``con-
taminated'' announcement dates, and we follow this practice. In order to
identify clean announcement dates, the FT Extel database and Stock Exchange
micro®che was searched on either side of the announcement date for other
``material'' announcements for that company. Following the practice in the
literature, we took as material announcements any involving earnings or divi-
dends (both actual and forecast) announcements for the year-end or any pre-
liminary results which were announced in a period two trading days prior to the
convertible issue announcement date and two days after. In addition data on
individual issues like issue size, maturity, length of call protection, call price was
also obtained from the ®lings made with the Company Announcements Oce
and the FT-Extel database. Finally, for the event study, dividend adjusted or-
dinary share price data for each ®rm in the sample was obtained from Data-
stream. The ®nal sample of convertible issues, which met the selection criteria
8
For example, Mikkelson and Partch (1986) use the earlier of the date of the ®rst report of the
oering in the Wall Street Journal and the trading day following the date the oering was registered
with the Securities and Exchange Commission.
9
Each announcement is stamped with two dates; one which indicates the date on which the
information was lodged with the Company Announcements Oce and the second, being the date
and time of its release to the market. These two dates are often identical since the information is for
immediate release.
10
Due to missing micro®ches, however, a few announcement dates could not be obtained, such
issues were also excluded from the sample.
detailed earlier and also had the daily share price data available consisted of 237
convertible issues of which 118 issues have clean announcement dates.
4.2. Methodology
The announcement period abnormal returns are computed using a standard

event study methodology 11 (Mikkelson and Partch, 1986; Fields and Mais,
1991). For each ®rm in the sample, a one-factor model is estimated using the
period (ÿ160, ÿ60) where day 0 is the announcement day. The market return is
the rate of return on a value-weighted index ± the FT-Allshare Index, a market-
value weighted index of the top 500 stocks trading on the London Stock Ex-
change. Daily abnormal returns were calculated by taking the dierence
between the actual daily return and the conditional expected return based on
the market model 12 parameters. Cumulative abnormal returns (CARs) were
calculated over a variety of windows. 13 In most similar studies, based on
announcements dates taken from the ®nancial press, the standard event win-
dow used is days (ÿ1, 0); where day 0 is the day of the ®rst announcement. A
feature of the present study is that the announcement date is exactly known
and hence the event window of interest is day 0. However, many of the com-
pany announcement took place late in the trading day. Hence, following Lease
et al. (1991), the CARs are reported over the two-day event window (0, 1). This
would help account for any order ¯ow imbalances that may result due to some
of the stock transactions actually taking place on the day after the an-
nouncement.
In addition, the following cross-sectional data, on the sample of convertible
issuers, was obtained from Datastream. The data based on annual accounting
reports was obtained, unless otherwise indicated, as reported for the year prior
to that in which the announcement took place (referred to as year ÿ1).
1. Firm size: Measured by the natural logarithm of market value (year ÿ1).
2. Growth opportunities: For this variable we use a proxy for TobinÕs Q, the
ratio of the market value of the ®rm to the book value of its assets (year 0).
3. Financial leverage: Book value of debt divided by the market value of equity
(pre-issue year).
11
Campbell et al. (1997) and Thompson (1995) provide excellent reviews of the current practice
in this area.
12
We also estimated a mean-adjusted return model. Since the results are qualitatively similar
they are not, to conserve space, reported here. In addition, we found that making corrections for
thin trading, such as those in Scholes and Williams (1977) and Dimson (1979), did not materially
aect the results either.
13
We also computed CARÕs over the following windows; days (ÿ60, ÿ20) and (ÿ19, ÿ1) and the
post-event window period (+1, +20) but do not report these since none of these are signi®cant.
4. Issue maturity: Time between the issue date and the date on which the issue
is ®rst callable.
5. Relative size of the issue: Ratio of the value of the convertible issue to the
market value of the ®rm prior to the issue announcement (year ÿ1).
5. Empirical results
5.1. Descriptive statistics
We provide, in Tables 2±4, some descriptive statistics of the sample of

convertible securities. As Table 2 indicates, there are a total of 237 convertible
security issues in the full sample comprising 129 convertible bonds and 108
convertible preference share issues. The convertible bond sample also contains
17 convertible capital bonds. We report, separate announcement date eects
for this sub-sample, but these results need to be viewed with caution due to the
small sample size. Out of the full sample, there are 73 convertible bond issues
Table 2
Annual distribution of convertible security issues over sample period (1982±1996)
Year Convertible bondsa;b Convertible preferred stock
c
Full % Clean % Full % Cleanc %
sample sample sample sample
1982 0 0 0 0 3 2.8 1 2.2
1983 6 4.7 3 4.1 3 2.8 0 0
1984 9 7.0 3 4.1 5 4.6 2 4.4
1985 7 5.4 4 5.5 12 11.1 0 0
1986 7 5.4 5 6.8 12 11.1 6 13.3
1987 25 19.4 20 27.4 16 14.8 4 8.9
1988 7 5.4 4 5.5 33 30.5 19 42.2
1989 5 3.9 1 1.4 11 10.2 5 11.1
1990 16 12.4 9 12.3 4 3.7 4 8.8
1991 8 6.2 7 9.6 3 2.8 3 6.6
1992 3 2.3 2 2.7 0 0 0 0
1993 16 12.4 7 9.6 6 5.6 1 2.2
1994 10 7.8 4 5.5 0 0 0 0
1995 4 3.1 0 0 0 0 0 0
1996 6 4.7 4 5.5 0 0 0 0
Total 129 73 108 45
a
Includes convertible bond and convertible capital bond samples.
b
Of the 129 convertible bonds, 66 are domestic and 63 are Euro-convertible issues.
c
``Clean issues'' are those cases that have been screened to ensure that the issuing ®r has not made
any important announcements unrelated to the convertible issue during the event window period.
Table 3
Descriptive statistics of convertible security issues by method and purpose of issue
Security Rights Placings Open Mixed Total
issues oers oers
Panel A ± by method of issue
Convertiblea Full 53 47 4 8 112
Bonds Cleanb 20 36 2 3 61
Convertible Full 57 10 2 39 108
Preferred stock Clean 22 7 2 14 45
Debt re®- Capital Speci®c Mixed General Total
nancing expendi- acquisi- uses corporate
ture tions or other
Panel B ± by purpose of issue
Convertible bondsa
Full sample 28 20 27 20 13 + 42 112
Cleanc sample 16 13 10 12 8 + 22 61
Convertible preference shares
Full sample 15 21 31 37 4 108
Cleanc sample 5 8 17 11 4 45
a
Does not include convertible capital bond sample.
b
Securities for which no reason was given for issue.
c
Clean issues are those cases that have been screened to ensure that the issuing ®r has not made any
important announcements unrelated to the convertible issue during the event window period.
and 45 convertible preference share issues which have clean announcement 14

dates. In addition, out of 129 convertible bond issues 66 are domestic issues
and 63 are Euro-convertible issues. Finally, as Table 2 shows, there is a fairly
even distribution of issues across the sample period. Next Table 3 (Panel A)
provides details of the convertible securities by method of issue; most of the
convertible bond issues are either through rights issues (43%) or private
placements (44%). By contrast, convertible preference shares are issued largely
through rights oers (53%) and mixed oerings (36%) with only 9% by private
placements. In Panel B of Table 3, the distribution of issues by their stated
purpose of issue, is indicated. It would be seen that the distribution of con-
vertible bonds in the sample is fairly even across dierent purposes while the
majority of the convertible preference share issues are for ®nancing speci®c
acquisitions and mixed uses.
Finally, further descriptive statistics about the cross-sectional characteristics
of the sample ®rms are presented in Table 4. First, the total amount issued by
®rms, in the sample, over the entire sample period was £18.78bn with an
14
In these cases there are no announcements by the company of any ``news'' which may have an
eect on share price other than the announcement of the issue of a convertible security.
Table 4
Descriptive statistics of convertible security sample
Full Cleana Convertible Convertible Convertible Convertible
sample sample bond full bond clean preference preference
sample sample shares full shares
sample
Sample size 237 118 129 73 108 45
Amount issued (£M)
Total 18,780.7 8918.3 15,381.2 7405.2 3399.5 1513.1
Mean 79.2 75.6 119.2 101.4 31.5 33.6
Median 37.5 49.0 69.0 73.0 14.6 18.0
Maximum 670.3 500.0 670.3 500.0 425.0 188.9
Minimum 0.18 0.18 0.50 2.0 0.18 0.18
Mean market value (£M) (median)
On Ann. date 724.7 889.9 1,214.1 1,326.9 140.3 180.9
(139.7) (458.3) (947.3) (1,037.6) (48.5) (65.9)
1 Week prior to 732.2 896.4 1,225.8 1,339.0 1,42.6 178.4
ann. date
(141.3) (454.0) (928.1) (1066.0) (49.2) (66.2)
b
Relative size of issue (%)
Mean 0.322 0.215 0.239 0.142 0.423 0.332
Median 0.234 0.160 0.120 0.070 0.299 0.243
Conversion premiumc (%)
Mean 0.095 0.127 0.090 0.151 0.101 0.088
Median 0.112 0.126 0.109 0.151 0.114 0.114
a
Clean issues are those cases that have been screened to ensure that the issuing ®r has not made any
important announcements unrelated to the convertible issue during the event window period.
b
Relative size is the total amount of the issue divided by the market capitalisation of the issuing
®rm seven days prior to the announcement date.
c
Conversion premium is the conversion price at announcement divide by the unadjusted price of
the shares on the announcement date.
average issue size of £79.24m and a median issue size of £37.45m. The clean
sub-sample shows a slightly smaller average issue size of £75.579m and a
marginally larger median of £49m. The average size of issue for convertible
bonds is much larger than that for preference shares. The mean market value of
®rms, in the sample, a week prior to the announcement date and on the an-
nouncement date give a clear indication of the valuation impact of the various
types of issues; in every case the impact is negative. Further, the average size of
the ®rm issuing convertible bonds is about seven times that of the ®rm issuing
convertible preference shares. Also, as the median values indicate, the distri-
bution of ®rms is skewed particularly in the case of convertible preference share
issuers. The distribution by size of issue is also skewed; the largest convertible
bond issue is for £670.3 million (£425m for convertible preference shares) while
the smallest issue is £2 million of convertible bonds (£0.175m for convertible
preference shares). The size of the issue relative to the issuing ®rmÕs market
value has a median of 12% for the full sample of convertible bond issuers (129
®rms) while that for the full sample of convertible preference share issuers (108
®rms) is higher at about 30%. Finally, the median conversion premium was
about 11% for both convertible bonds convertible preference shares in their
respective full samples.
5.2. Stock price reaction to convertible security oerings
In Table 5, we report the CARs over a two-day event window around the
announcement date of the convertible security oer. In addition, we computed
CARs separately for clean and the ``full'' sample. However since the results
were qualitatively similar we only report here CARs for the full sample in each
category of convertible securities. In Panel A of Table 5, the two-day CARs
and the associated t-statistics for the sample of convertible bonds, convertible
preference shares and convertible capital bonds are reported. The results
clearly suggest that the sale of all three types of convertible securities convey
negative information to the market. The two-day announcement window re-
sults show that the market reaction is negative and statistically signi®cant;
ÿ1.21% for convertible bonds; ÿ1.02% for convertible preference shares; and
ÿ2.65% for convertible capital bonds.
The negative average announcement day aects for UK ®rms (about ÿ1.2%)
issuing convertible bonds is smaller than what has been reported for US ®rms
which is about ÿ2.0% on average (see Table 1 for details). Also in the case of
UK ®rms the negative reaction to convertible bonds and convertible preference
shares is of a similar size. Our results dier, in this respect, from those reported
for US ®rms by Davidson et al. (1993), who ®nd a signi®cant and more neg-
ative reaction (ÿ2.45%) for convertible preference shares than for convertible
bonds. The wealth eect on UK ®rms issuing convertible preference shares is
much smaller (ÿ1.01%) than that reported for US ®rms (ÿ2.015%) in Linn and
Pinegar (1988). It is possible that these dierences could be due to diering
regulatory environments as well as corporate governance structures between
countries as noted in Kang and Stulz (1996).
As indicated above convertible capital bond issuers experience the largest
(most negative) fall in market value. The results, are consistent with the idea
that the convertible capital bonds are viewed by the market as the ``nearest to
equity'', of the three instruments, in line with their UK accounting classi®ca-
tion. In our sample, convertible capital bonds have a maturity of about one
year and therefore have a relatively short time to conversion into the under-
lying equity as compared to convertible bonds which have an average maturity
of about 10 years. Also, as indicated earlier, prior to 1994, most issuing
companies classi®ed these as `èquity''. It needs to be noted however that the
Table 5
Announcement period average abnormal returns for full sample
Event window Convertible securities Convertible bonds Convertible Convertible capital bonds full sample (n 17)
full sample (n 37) full sample (n 112) preference shares
full sample (n 108)
Abnormal t-value Abnormal t-value Abnormal t-value Abnormal t-value
return return return return
(A) All convertible securities
Mean two-day 0 CAR ÿ0.01321 ÿ8.51 ÿ0.01208 ÿ4.68 ÿ0.01019 ÿ4.61 ÿ0.03980 ÿ8.13
Event window Convertible bond Type of oer

Full sample (n 112) Rights issues (n 53) Placings (n 47) Mixed oers (n 8) Open oers (n 4)
Abnormal t-value Abnormal t-value Abnormal t-value Abnormal t-value Abnormal t-value
return return return return return
(B) Convertible bonds ± by method of issue
Mean two-day CAR ÿ0.01208 ÿ4.68 ÿ0.00948 ÿ2.40 ÿ0.01510 ÿ4.31 0.02374 2.30 ÿ0.08272 ÿ3.58
Event window Convertible preference share Type of oer

Full sample (n 108) Rights issues (n 57) Placings (n 10) Mixed oers (n 39) Open oers (n 2)
Abnormal t-value Abnormal t-value Abnormal t-value Abnormal t-value Abnormal t-value
return return return return return
(C) Convertible preference share ± by method of issue
Mean two-day CAR ÿ0.01019 ÿ4.61 ÿ0.01712 ÿ4.73 0.00272 0.25 ÿ0.00341 ÿ1.96 ÿ0.00910 ÿ0.57
*
A. Abhyankar, A. Dunning / Journal of Banking & Finance 23 (1999) 1043±1065
Signi®cant at the 0.05 level (two-tailed).

**
1057
sample of convertible capital bonds is small thus making it dicult to draw any
strong conclusions.
Davidson et al. (1993) ®nd weak evidence in favour of a tax-induced le-
verage hypothesis in their study of the dierence between CARs of con-
vertible bond and convertible preference share issues. They suggest that
common stock returns around announcement of convertible bond issues
should be larger (or less negative) than that for convertible preferred share
issues because the ®rm has the advantage of interest tax deduction on
convertible debt while it is outstanding but not for convertible preference
issuing ®rms. Our results contrast with the tax-induced leverage hypothesis
since, in our sample, convertible preference shares have announcement pe-
riod negative abnormal returns which are similar in size to those for con-
vertible bonds. Our results suggest that the magnitude of this tax advantage
is smaller than the eect of the ``cash ¯ow shortage'' or the ``pecking order''
eects.
5.3. Stock price reaction by method and purpose of issue
In Panels B and C of Table 5, we report wealth eects for convertible bond

and convertible preference share issuers by method of oering; rights issues,
private placements, mixed and open oers. The results indicate that there is a
statistically signi®cant negative reaction to the main methods of issue of con-
vertible bonds; ÿ0.95% for rights issues and ÿ1.51% for private placements.
Our results for private placements of convertible bonds contrast with the sig-
ni®cant positive reaction to privately placements of convertible bonds noted in
Fields and Mais (1991) and in Wruck (1989) for private equity placements. For
the sub-sample of convertible preference shares shown in Panel C, it is seen that
both rights (ÿ1.17%) and mixed oerings (ÿ0.34%) have a signi®cant negative
wealth impact on the issuer.
We report in Panels A and B of Table 6, the mean two-day CAR separately
for the convertible bonds and preferred stocks by the stated purpose of use of
the funds. Convertible bonds issues, where the intended purpose is to re®nance
existing debt, ®nance speci®c acquisitions or for general mixed purposes all
produce a signi®cantly negative impact; ÿ2.80%, ÿ0.062% and ÿ1.51%, re-
spectively. However convertible bond issues to ®nance capital expenditures
have a positive (1.08%) and signi®cant reaction on equity value. A consistent
negative reaction is seen (Panel B) for convertible preference shares issues made
for debt re®nancing (ÿ5.90%), capital expenditure (ÿ0.71%) and for speci®c
acquisitions (ÿ0.21%).
Finally, in Table 7 we report announcement period returns for the con-
vertible bond sample partitioned into domestic and Euro-market issues. We
®nd that in both markets, convertible bond issues produce negative announce-
ment period returns; ÿ1.01% for domestic and ÿ1.35% for Euro-convertible.
Table 6
Announcement period average abnormal returns for convertible preference shares by purpose of issue
Event window Convertible bond Stated purpose of issue
Full sample Debt re®nancing Capital expendi- Specifc acquisi- Mixed uses General & other
(n 112) (n 28) ture (n 20) tions (n 27) (n 20) (n 13)
Abnormal t-value Abnormal t-value Abnormal t-value Abnormal t-value Abnormal t-value Abnormal t-value
return return return return return return
(A) Convertible bond ± by purpose of issue
Mean two-day ÿ0.01208 ÿ4.68 ÿ0.02797 ÿ2.90 0.01076 2.12 ÿ0.00620 ÿ4.27 ÿ0.01512 ÿ2.80 ÿ0.02545 ÿ4.41
CAR
Event window Convertible preference share Stated purpose of issue

Full sample Debt re®nancing Capital expendi- Speci®c acquisi- Mixed uses General & other
(n 108) (n 15) ture (n 21) tions (n 31) (n 37) (n 4)
Abnormal t-value Abnormal t-value Abnormal t-value Abnormal t-value Abnormal t-value Abnormal t-value
return return return return return return
(B) Convertible preference share ± by purpose of issue
Mean two-day ÿ0.01019 ÿ4.61 ÿ0.0590 ÿ5.41 ÿ0.00712 ÿ2.45 ÿ0.00307 ÿ1.72 ÿ0.00206 ÿ1.18 0.02606 0.50
CAR
*
Signi®cant at the 0.05 level (two tailed).
**
A. Abhyankar, A. Dunning / Journal of Banking & Finance 23 (1999) 1043±1065
1059
Table 7
Announcement period average abnormal returns for convertible bonds domestic and Euro-con-
vertible issues
Event window Domestic convertible bonds Euro-convertible bonds (n 50)
(n 62)
Abnormal t-value Abnormal t-value
return return
Mean two-day CAR ÿ0.01008 ÿ2.22 ÿ0.01352 ÿ4.53
*
**
The dierence between the two-day CARs is not signi®cant (t 1.40). We

conclude from this that there is a fair degree of integration between the do-
mestic and Euro-sterling markets. These results are similar to those reported by
Kim and Stulz (1992), for the period after 1984, when there were no tax-related
advantages for US issuers in the Euro-market as compared to the domestic US
market.
5.4. Cross-sectional regression results
We next use regression analysis to examine the relation between the an-
nouncement period abnormal returns and cross-sectional ®rms predicted by
several theoretical models. As discussed earlier, Brennan and Kraus (1987) and
Brennan and Schwartz (1988) suggest that announcement period abnormal
returns are; negatively to credit quality and ®rm value; positively related to
®rm-speci®c proxies for investment policies that are dicult to predict; nega-
tively to post-conversion equity ownership allocated to bondholders and
positively to the face value of the convertible issue (expresses as a fraction of
the pre-announcement equity value). Further, Green (1984) implies that an-
nouncement period abnormal returns would be related to future growth op-
portunities after controlling for dierences in corporate investment policy shifts
and underinvestment. Finally, Stein (1992) predicts that announcement period
abnormal returns are related: positively to ®rm-speci®c proxies for ®nancial
distress; positively to the issuing ®rmÕs ®nancial leverage and negatively to the
length of call protection.
In the context of the Stein model, ®rm size could be considered to be a proxy
for the degree of information asymmetry, since larger ®rms are more likely to
have a greater analyst coverage and to undergo greater scrutiny by institutional
investors (see for example OÕBrien and Bhushan, 1990). In addition, ®rm size
could be a proxy for ®nancial distress costs. In either case we could expect the
two-day CARs to be positively related to ®rm size or the market value of equity
(in the year prior to the convertible issue). Since ®nancial distress and bank-
ruptcy could be related to higher levels of debt and business risk, we proxy this
risk with a measure of ®rm leverage. Stein (1992) argues that convertible debt
issues by highly leveraged ®rms might serve as credible signals of improved
future performance. We use the debt ratio as an explanatory variable calcu-
lated as the market value of debt to market value of equity in the year prior to
the announcement year as a measure of leverage. According to Miller and
Rock (1985), if the size of the earnings shortfall, abnormal returns are related
to the issue size. Therefore our tests also include the relative size of issue, de-
®ned as the value of the convertible issue proceeds divided by total assets of the
®rm in that year. As indicated in Green (1984), we include, in the regression, as
a measure of anticipated future growth opportunities the market-to-book ratio.
This is calculated as the market value of common stock plus the book value of
preferred stock plus the book value of long term debt divided by the book
value of total assets. Finally, we include, based on the arguments in Stein
(1992), the time in years between the issue date and the date on which the issue
is ®rst callable as a proxy for the length of call protection which is predicted to
be negatively related to the announcement period abnormal returns.
Based on above analysis the following multivariate regression is estimated:
APARi;t a0 a1 log firm valuetÿ1 a2 debt ratio

MV
a3 RelSize a4 a5 IssueMat
BV t1
where APARi;t is the announcement period abnormal return for the ith ®rm for
the two-day event window and a1 are the coecients to be estimated. The
reported test statistics are based on White (1980) heteroscedasticity-corrected
standard errors.
In Table 8, we report the results of this regression. The second column in the
Table indicates the sign of the coecients predicted by Brennan and Schwartz
(1988), Brennan and Kraus (1987) and Stein (1992). The sample of ®rms in
these cross-sectional regressions is limited to convertible bond issuers since
there are no speci®c theories relating to cross-sectional regressions is limited to
convertible bond issuers since there are no speci®c theories relating an-
nouncement day eects to the characteristics of preferred stock issuers. The
results in Table 8 indicate that the coecient for ®rm value has a positive sign
but is not signi®cant. These results do not conform to the predictions of the
unobservable risk hypothesis there ought to be a negative relation between
announcement day returns and ®rm size. It appears that, in the UK, an-
nouncement day eects unrelated to ®rm size. However, the results support the
Stein (1992) prediction that CARs are positively related to size if it is a proxy
for increased information asymmetry as well as the possibility of ®nancial
distress. Further, coecients relating the CARs to the debt ratio are positively
related though statistically insigni®cant supporting the Stein (1992) idea that
convertible debt issues by highly leveraged ®rms might be seen as credible
Table 8
Results of regressions to estimate the cross-sectional determinants of announcement period average
abnormal returns for convertible bonds
Predicted sign
Brennan and Stein Coecientsa
Schwartz
Intercept ÿ0.1161
(0.0591)
Log (®rm value) (ÿ) (+) 0.0045
(0.0036)
Debt ratio (pre-issue) (+) 0.0080
(0.0133)
Relative size of convertible bond (+) 0.0169
issue (RelSize)
(0.0498)
Market value/book value (at t + 1, (+) 0.0016
proxy for growth opportunity)
(0.0066)
IssueMat (issue maturity) (ÿ) 0.0026
(0.0012)
Adjusted R2 0.247
Sample size 43
a
The ®gures in parenthesis are the White (1980) standard errors.
***,** and * indicate that the coecient is signi®cant at the 0.01, 0.05 and 0.1 levels.
signals of improved performance by investors. Our regression also contains the

relative size of an issue as an explanatory variable; the results suggest that,
while statistically insigni®cant, the CARs are positively related to the relative
size variable supporting the prediction in Brennan and Schwartz (1988). Next,
the coecient for the market-to-book ratio is of the right sign but is not sig-
ni®cant. Finally we observe that the coecient for issue maturity is the only
one variable which is signi®cant but is of the opposite sign to that predicted by
the Stein model.
6. Summary and conclusions
The main purpose of this article is to examine the valuation eect of the
announcement of the issue of three types of convertible securities; convertible
bonds and convertible capital bonds and convertible capital bonds. We ®nd
that the issue of all three types of securities has a negative impact on ®rm value.
The reaction for convertible bonds is similar to that for convertible preference
shares. In terms of the theoretical models, the results support the cash-¯ow-
storage hypothesis of Miller and Rock (1985) and the pecking order hypothesis
of Myers and Majluf (1984). They are also consistent with SmithÕs hypothesis
that new ®nancing by industrial ®rms conveys multiple signals to the market.
In the case of convertible preferred shares, the negative abnormal return,
however suggests that information eects dominate any bene®cial eects from
reducing agency costs by aligning the interests of common stockholders with
those of senior security holders through the issue of convertible preferred
shares. Finally, the observed results are not consistent with the optimal-capital-
structure hypothesis, in which the ®rm trades o the interest tax shield and
bankruptcy costs to maximise value because the hypothesis predicts a non-
negative change in the value no matter what the sign of the leverage change
(Smith, 1996). Secondly we observe a negative wealth eect following issues of
convertible bonds for all methods of issue including private placements. This is
in contrast to the evidence on private issues of equity as in Wruck (1989). Next
we ®nd that there are negative wealth eects for convertible bond and preferred
stock issuers whose stated purpose of issue is to re®nance previous debt or
®nance speci®c acquisitions or for mixed ®nancing uses. However, ®rms issuing
convertible bond to ®nance capital expenditure schemes exhibit a small but
signi®cant positive wealth eect. Finally, we ®nd only limited support for
testable implications of the Stein (1992) model and that of Brennan and
Schwartz (1988) and Brennan and Kraus (1987). In particular we ®nd that ®rm
size, unlike in the US, is not an important determinant of cross-sectional an-
nouncement day abnormal returns.
Acknowledgements
We would like to acknowledge, with thanks, the help received from Shuana
Woolard and Graeme Pitt of FT-Extel, London and Roy Baker in compiling
the data set. We are grateful to seminar participants at Cardi Business School,
Department of Economic Studies, University of Dundee, City University
Business School and Warwick Business School and especially to two anony-
mous referees for helpful comments and suggestions. All remaining errors are
the responsibility of the authors.
References
Barnea, A., Haugen, R., Senbet, L., 1980. A rationale for debt maturity structure and call provision
in the agency theoretic framework. Journal of Finance 35, 1223±1234.
Billingsley, R.S., Lamy, R.E., Smith, D.M., 1990. Units of debt with warrants: Evidence of the
penalty-free issuance of an equity like security, Journal of Financial Research 197±199.
Brennan, M., Kraus, A., 1987. Ecient ®nancing under asymmetric information. Journal of
Finance 42, 1225±1243.
Brennan, M.J., Schwartz, E.S., 1988. The case for convertibles. Journal of Applied Corporate
Finance 1, 55±64.
Campbell, J., Lo, A., MacKinlay, A.C., 1997. The Econometrics of Financial Markets. Princeton
University Press, Princeton, NJ.
Dann, L., Mikkelson, W.H., 1984. Convertible debt issuance, capital structure change and
®nancing-related information: Some new evidence. Journal of Financial Economics 13, 157±186.
Davidson, W.N., Glascock, J.L., Koh, W.J., 1993. A test of the tax-induced leverage hypothesis in
convertible securities: A note. Journal of Business Finance and Accounting 20 (1), 99±106.
DeAngelo, H., Masulis, R.W., 1980. Optimal capital structure under corporate and personal
taxation. Journal of Financial Economics 8, 3±30.
De Roon, F., Veld, C., 1995. Announcement eects of convertible bond loans versus warrant bond
loans: An empirical analysis for the Dutch Market. Cent ER Discussion Paper, No 9509,
Tilburg University.
Diamond, D., 1993. Seniority and maturity of debt contracts. Journal of Financial Economics 33,
341±368.
Dimson, E., 1979. Risk measurement when shares are subject to infrequent trading. Journal of
Financial Economics 7, 197±226.
Eckbo, B.E., 1986. Valuation eects of corporate debt oerings. Journal of Financial Economics
15, 119±151.
Eckbo, B.E., Masulis, R.W., 1995. Seasoned equity oerings. In: Jarrow, R., Maksimoric, V.,
Ziemba, W.T. (Eds.), Finance. Elsevier, Amsterdam, pp. 1017±1067.
Fields, L.P., Mais, E.L., 1991. The valuation eect of private placements of convertible debt.
Journal of Finance 26, 327±349.
Flannery, M., 1986. Asymmetric information and risky debt maturity choice. Journal of Finance
41, 19±37.
Green, R, 1984. Investment incentives, debt and warrants. Journal of Financial Economics 13, 115±
136.
Hansen, R.S., Crutchley, C., 1990. Corporate earnings and ®nancing an empirical analysis. Journal
of Business 63, 349±371.
Harris, M., Raviv, A., 1991. The theory of capital structure. Journal of Finance 46, 297±355.
Janjigian, V., 1987. The leverage changing consequences of convertible debt ®nancing. Financial
Management 15±21.
Jensen, M.C., Meckling, W.H., 1976. Theory of the ®rm: managerial behaviour, agency costs and
ownership structure. Journal of Financial Economics 3, 305±360.
Kang, J.-K., Stulz, R.M., 1996. How dierent is Japanese corporate ®nance? An investigation
of the information content of new security issues. Review of Financial Studies 9 (1), 109±
139.
Kang, J.K., Kim, Y.-C., Park, J., Stulz, R.M., 1995. An analysis of the wealth eects of Japanese
oshore dollar denominated convertible and warrant bond issues. Journal of Financial and
Quantitative Analysis 30, 257±270.
Kim, Y.-C., Stulz, R.M., 1992. Is there a global market for convertible bonds. Journal of Business
65 (1), 75±91.
Kraus, A., Litzenberger, R., 1973. A state preference model of optimal ®nancial leverage. Journal
of Finance 28, 911±922.
Lease, R.C., Masulis, R.W., Page, J.R., 1991. An investigation of market microstructure impacts
on event study returns. Journal of Finance 46, 1523±1537.
Linn, S.C., Pinegar, J.M., 1988. The eect of issuing preferred stock on common and preferred
stockholder wealth. Journal of Financial Economics 22, 154±184.
Long, M.S., Sefcik, S.E, 1990. Participation ®nancing: A comparison of the characteristics of
convertible debt and straight bonds issued in conjunction with warrants. Financial Manage-
ment, Autumn 23±34.
Marshall, A., 1995. Innovation in euromarket hybrid funding instruments. European Financial
Management 1 (3), 331±340.
Masulis, R.W., 1988. The Debt Equity Choices, Ballinger Press, Cambridge, MA, USA.
McInnes, W.M., Marshall, A.P., Draper, P., 1994. The Classi®cation of Fund Raising Instruments
which have both Debt and Equity Characteristics. Research Board Institute of Chartered
Accountants of England and Wales, London.
Mikkelson, W.H., Partch, M.M., 1986. Valuation eects of security oerings and the issuance
process. Journal of Financial Economics 15, 30±60.
Miller, M., Rock, K., 1985. Dividend policy under asymmetric information. Journal of Finance 40,
1031±1051.
Miller, M., 1977. Debt and taxes. Journal of Finance 32, 261±276.
Myers, S., 1977. Determinants of corporate borrowing. Journal of Financial Economics 5, 147±175.
Myers, S.C., Majluf, N., 1984. Corporate ®nancing and investment decisions when ®rms have
information that investors do not have. Journal of Financial Economics 13, 187±221.
OÕBrien, P.C., Bhushan, R., 1990. Analysts following and institutional ownership. Journal of
Accounting Research 28 (Suppl.), 55±76.
Scholes, M., Williams, J., 1977. Estimating betas from nonsynchronous data. Journal of Financial
Economics 5, 309±328.
Smith Jr, C.W., 1986. Investment banking and the capital acquisition process. Journal of Financial
Economics 15, 3±29.
Stein, J., 1992. Convertible bonds as backdoor equity ®nancing. Journal of Financial Economics
32, 3±21.
Thompson, R., 1995. Empirical methods of event studies in ®nance. In: Jarrow, R. Maksimoric,
M., Ziembo, W.T. (Eds.), Finance. Elsevier, Amsterdam, pp. 963±989.
UK Accounting Standards Board, 1993. Financial Reporting Standard 4-Accounting for Capital
Instruments. London.
White, H., 1980. A heteroscedasticity consistent covariance matrix estimator and a direct test of
heteroscedasticity. Econometrica 48, 817±838.
Wruck, K.H., 1989. Equity ownership concentration and ®rm value: Evidence from private equity
®nancing. Journal of Financial Economics 23, 3±28.

Abhyankar &amp; Dunning

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Abhyankar &amp; Dunning

Uploaded by

Copyright:

Available Formats

Journal of Banking & Finance 23 (1999) 1043±1065

Wealth eects of convertible bond and

We examine the wealth eects of the announcement of issues of dierent types of

JEL classi®cation: G0; G1; G3

Keywords: Convertible securities; Convertible preferred stock; Convertible capital

The shareholder wealth eects of security oerings by ®rms have been

2. Review of the theoretical background

2.1. Theoretical models of determinants of announcement period abnormal

Several theoretical models 5 related to the motivation for issuing of con-

inclusion of a conversion option in longer term debt may be necessary to

2.2. Theoretical models of the valuation impact of security issues in general

2.2.1. Optimal capital structure eects

2.2.2. Asymmetric information and cash ¯ow eects

2.2.3. Adverse selection eects

3. Review of prior empirical evidence

We provide in Table 1, based largely on the detailed information in Eckbo

4. Data and methodology

4.1. Data description

The announcement period abnormal returns are computed using a standard

5.1. Descriptive statistics

We provide, in Tables 2±4, some descriptive statistics of the sample of

and 45 convertible preference share issues which have clean announcement 14

5.2. Stock price reaction to convertible security oerings

Event window Convertible bond Type of oer

Event window Convertible preference share Type of oer

Signi®cant at the 0.05 level (two-tailed).

5.3. Stock price reaction by method and purpose of issue

In Panels B and C of Table 5, we report wealth eects for convertible bond

Event window Convertible preference share Stated purpose of issue

The dierence between the two-day CARs is not signi®cant (t  1.40). We

5.4. Cross-sectional regression results

APARi;t  a0  a1 log firm valuetÿ1  a2 debt ratio

signals of improved performance by investors. Our regression also contains the

6. Summary and conclusions

You might also like

Abhyankar & Dunning

Abhyankar & Dunning

Wealth eects of convertible bond and

We examine the wealth eects of the announcement of issues of dierent types of

The shareholder wealth eects of security oerings by ®rms have been

2.2.1. Optimal capital structure eects

2.2.2. Asymmetric information and cash ¯ow eects

2.2.3. Adverse selection eects

5.2. Stock price reaction to convertible security oerings

Event window Convertible bond Type of oer

Event window Convertible preference share Type of oer

In Panels B and C of Table 5, we report wealth eects for convertible bond

The dierence between the two-day CARs is not signi®cant (t 1.40). We

APARi;t a0 a1 log firm valuetÿ1 a2 debt ratio