The authors have benefited from the comments and suggestions of Reinhold Lamb, Larry Blose, Scott Lee, finance workshop participants at Georgia State University and Texas A & M University, and the two anonymous referees. However, only the authors are responsible for any remaining errors. Programming assistance by Steve Sonderman is gratefully acknowledged. Mehta's contribution was partially supported by a research grant from the College of Business Administration of Georgia State University.
Convertible Bond Issues: Evidence from Security Markets
Article first published online: 9 MAR 2005
Volume 30, Issue 4, pages 781–807, November 1995
How to Cite
Mehta, D. R. and Khan, A. Q. (1995), Convertible Bond Issues: Evidence from Security Markets. Financial Review, 30: 781–807. doi: 10.1111/j.1540-6288.1995.tb00856.x
- Issue published online: 9 MAR 2005
- Article first published online: 9 MAR 2005
A convertible bond (CB) is a hybrid security containing elements of both common stock and straight debt. Still, empirical investigations on CB issue announcements have failed to discern any pattern in the stock market reaction that is consistent with announcements of either common equity or straight debt issues. This study shows that (a) motives for issuing the CB and (b) its rating (and to a less extent the riskiness of the issuing firm) help explain the stock market reaction to CB issue announcements. Specifically, announcement of a CB issue with an explicitly stated motive for the use of proceeds, when coupled with a high (low) bond rating, generates a stock market response similar to a straight debt (common stock) issue. On the other hand, the preference of CB holders is dictated by the motive for the use of proceeds and the conversion premium. These findings highlight the critical importance of the motive of issue in determining reactions in both the stock and bond markets.