Long-term Equity and Operating Performances following Straight and Convertible Debt Issuance in the U.S.*


  • *

    This paper is part of my doctoral dissertation at the University of Houston. I am especially grateful to Sorin Sorescu for his encouragement and guidence. Also, I would like to thank D. Katherine Spiess at the FMA Conference and two anonymous referees for helpful comments

**Kookmin University, College of Business Administration, 861-1 Chongnung-dong, Songbuk-gu, Seoul, Korea, 136-702; E-mail: mjung@kookmin.ac.kr; Tel: +82-2-910-4840; Fax: +82-2-910-4519.


This paper shows that long-term equity and operating performances that follow straight and convertible debt issuance in the U.S. are different, just as are announcement-period market reactions, supporting the notion that market investors initially underreact to a selective event of convertible debt issuance. Cross-sectional tests reveal that firms issuing convertible debt often suffer stock underperformance partly because of their deteriorating fundamentals subsequently to the issuance. Even when each convertible bond directly matches with a straight bond that has a similar offering date and issuer and bond characteristics, convertible debt issuers still significantly under-perform straight debt issuers, supporting that what matters for long-term equity and operating performances is the type of debt offering.