Determinants of the stockholder reactions to convertible debt offering announcements: an analysis of the Western European market.

This paper examines the determinants of the stockholder reactions to convertible debt announcements made by Western European companies. We simultaneously test the impact of issuer characteristics, security design features, the stated uses of proceeds and the aggregate convertible debt issue volume. Our evidence suggests that the announcement returns are positively influenced by the maturity and conversion premium, and negatively influenced by the Eurobond feature, the level of post-conversion equity dilution and the aggregate convertible debt volume. We also document significant interaction effects between the issuer characteristics, the convertible debt design and the convertible debt market condition. First, we find that hot market convertibles are structured to be more 'debt-like' than non-hot market convertibles. Second, we show that the influence of the issuer characteristics depends on the convertible debt design: equity-like convertibles are perceived as instruments able to reduce adverse selection and financial distress costs, whereas debt-like convertibles are perceived as predominantly straight debt. Lastly, we demonstrate that issuer and security characteristics have much more power for explaining the investor reactions during non-hot markets than during hot markets.Determinants; Market; Companies; Characteristics; Security design; Design; Premium; Effects; Selection; Costs; Markets;

Are European convertibles more debt-like than the US issues? An empirical analysis.

The popular financial press often suggests that convertible debt issued by European firms is more debt-like in nature than convertible debt issued by US firms. This paper is the first to formally test the validity of this common perception. Our evidence indicates that European convertibles are effectively structured to be more debt-like than US convertibles. We also show that European convertible debt announcements induce less negative stockholder reactions than US announcements, which is consistent with the larger debt component of the former securities. Lastly, we explore some potential explanations for the relatively more debt-like design of European convertibles. Our results indicate that this finding may be attributable to both issuer-related and institutional differences across European and US convertible debt markets.Design; Firms; Market; Markets; Research;

Convertible bond announcement effects: why is Japan different?

U.S. and Japanese firms dominate global convertible bond issuance. Previous research documents more favorable convertible bond announcement effects in Japan than in the U.S. and other developed countries. Using a global sample of convertible bonds issued from 1982 to 2012, we find that the more favorable announcement effects of Japanese convertibles are driven by their stated uses of proceeds. Japanese convertibles more often include capital expenditure as an intended use, while U.S. firms tend to mention general purposes to motivate their offering. Our findings illustrate the value to firms of being more explicit when disclosing the intended use of proceeds of security offerings

Why do convertible issuers simultaneously repurchase stock? An arbitrage-based explanation

We examine why firms combine convertible debt offerings with stock repurchases. In 2006, 33% of the convertible issuers in the US simultaneously repurchased stock. These combined transactions are inconsistent with traditional motivations for convertible issuance. We document that convertible arbitrage drives these stock repurchases. Convertible debt arbitrageurs simultaneously buy convertibles and short sell the issuer's common stock, resulting in downward pressure on the stock price. To prevent such short-selling activity, firms repurchase their stock directly from arbitrageurs. We show that combined transactions exhibit lower short-selling activity and that convertible arbitrage explains both the size and speed of the stock repurchases

Corporate social responsibility and seasoned equity offerings

We examine whether corporate social responsibility (CSR) creates value for seasoned equity issuers. Using a sample of seasoned equity offerings (SEOs) by U.S. companies between 2004 and 2013, we find a positive association between CSR performance and the stock price reaction to SEO announcements. Surprisingly, however, further tests reveal that seasoned equity issuers with high CSR scores tend to have higher post-SEO increases in cash holdings, and lower investments in real assets, than issuers with low CSR scores. Moreover, high-CSR issuers have worse post-SEO operating and stock price performance than low-CSR issuers. Together, our findings suggest that high CSR scores mislead shareholders into attributing value-increasing motives to seasoned equity issues

Why Do Western European Firms Issue Convertibles Instead of Straight Debt or Equity?

Unlike their US counterparts, European convertible debt issuers tend to be large companies with small debt- and equity-related financing costs. Therefore, it is a puzzle why these firms issue convertibles instead of standard financing instruments. This paper examines European convertible debt issuer motivations by estimating a security choice model incorporating convertibles, straight debt, and equity. We find that European convertibles are used as sweetened debt, not as delayed equity. This motivation is also reflected in the highly debt-like design of most European convertible issues. In addition, we show that economy-wide and country-specific factors have a significant incremental impact on the convertible debt choice

Are There Windows of Opportunity for Convertible Debt Issuance? Evidence for Western Europe

This paper hypothesizes that hot convertible debt windows represent periods with lower convertible debt-related financing costs. Supporting this premise, we find that the stock price impact of Western European convertible debt announcements is significantly less negative during hot convertible windows. Importantly, this result holds while controlling for equity market, straight debt market and macroeconomic conditions. In addition, stockholders are less sensitive to issuer- and issue-specific financing costs during hot convertible markets. Overall, these findings indicate that hot convertible markets represent windows of opportunity for convertible debt issuance. Firms with high idiosyncratic financing costs act accordingly by timing their convertible offering during a hot market

Why are convertible bond announcements associated with increasingly negative issuer stock returns? An arbitrage-based explanation

While convertible offerings announced between 1984 and 1999 induce average abnormal stock returns of −1.69%, convertible announcement effects over the period 2000–2008 are more than twice as negative (−4.59%). We hypothesize that this evolution is attributable to a shift in the convertible bond investor base from long-only investors towards convertible arbitrage funds. These funds buy convertibles and short the underlying stocks, causing downward price pressure. Consistent with this hypothesis, we find that the differences in announcement returns between the Traditional Investor period (1984–1999) and the Arbitrage period (2000–September 2008) disappear when controlling for arbitrage-induced short selling associated with a range of hedging strategies. Post-issuance stock returns are also in line with the arbitrage explanation. Average announcement effects of convertibles issued during the Global Financial Crisis are even more negative (−9.12%), due to a combination of short-selling price pressure and issuer, issue, and macroeconomic characteristics associated with these offerings