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Operating Performance and Stock Returns of Firms Calling Convertible Preferred Stocks

Authors

  • Palani-Rajan Kadapakkam,

  • Huey-Lian Sun,

  • Alex P. Tang

    Corresponding authorSearch for more papers by this author
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      The first author is from the Department of Finance, College of Business, University of Texas at San Antonio. The second and third authors are from the Department of Accounting and Finance, Graves School of Business & Management, Morgan State University. (Paper received January 2003, accepted September 2003)


Alex P. Tang, Department of Accounting and Finance, Graves School of Business & Management, Morgan State University, Baltimore, Maryland 21251, USA.
e-mail: atang@moac.morgan.edu

Abstract

Abstract:  Using methodologies developed by Barber and Lyon (1996 and 1997), we examine the long-run operating performance and stock returns of firms around in-the-money calls of convertible preferred stock. Our study intends to be a direct test of the hypothesis that managers call in-the-money convertibles when they view a decline in the firms’ performance. We find no evidence that calling firms underperform non-calling benchmark firms. On the contrary, we find mild evidence that the post-call operating performance of calling firms is better than a carefully selected group of benchmark firms and call firms’ post-call stock returns are no worse than benchmark firms.

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