A Re-Examination of Shareholder Wealth Effects of Calls of Convertible Preferred Stock

Authors

  • ERIC L. MAIS,

  • WILLIAM T. MOORE,

  • RONALD C. ROGERS

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    • Mais is from College of Business, University of Hawaii. Moore and Rogers are from College of Business Administration, University of South Carolina. The authors express sincere appreciation to Wayne Mikkelson for sharing his data and to Roy Brooks, Bruce Grundy, Gailen Hite, Steve Mann, and Rod Roenfeldt for helpful suggestions. Special thanks go to René Stulz and the refereee for many valuable comments, Craig Ansley for clarification of the statistical method, and Vicki Shealy for expert editorial assistance.


ABSTRACT

Common stock price reactions to announcements of 67 calls of in-the-money convertible preferred stocks are examined, and a significant average abnormal return of −1.6 percent is documented. The finding is robust to the choice of estimation period and the assumed return-generating process. Annual dividend obligations for the called preferred issues in the sample typically are greater than the dividends for the common shares into which they are converted, and announcement-period abnormal returns are negatively correlated with changes in dividends. Moreover, calls that result in dilution of voting rights appear to have greater adverse valuation effects than calls that do not alter voting rights concentration.

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