A study on the market reaction to hybrid securities announcements

Abstract The thesis presents three studies that focus on the wealth effects of hybrid securities namely: convertible bonds and warrant-bonds. The wealth effects of these hybrid securities are investigated through both meta-analysis and event-studies. Chapter 2 incorporates a review of the literature on wealth effects associated with the announcement of convertible bonds and warrant-bond loans. The findings of 35 event studies, which include 84 sub-samples and 6,310 announcements, are analysed using meta-analysis. A mean cumulative abnormal return of 1.14% for convertible bonds compared with 0.02% for warrant-bonds are observed, the significant difference confirming a relative advantage for warrant-bonds. Abnormal returns for hybrid securities issued in the United States are significantly more negative than for those issued in other countries. In addition, issuing hybrid securities to refund debt does not seem to be favoured by investors. Finally, several factors identified as important by theory or in prior research are not significant within the cross-study models, suggesting that more evidence is needed to confirm whether they are robust. Chapter 3 presents a study that examines the market reaction to hybrid security announcements in an emerging country, specifically Malaysia, from January 1996 to December 2009. The results indicate that announcements of the intention to issue convertible bonds in Malaysia are associated with significantly negative abnormal returns of 1.10% (significant at the 10% level) on the event window of (-1, 1). On the other hand, announcements of the intention to issue warrant-bonds document significantly positive abnormal returns of 2.25% (significant at the 10% level) on the same event window. The ‘univariate’ test confirms that the wealth effects associated with the announcement of the intention to issue warrant-bonds is larger (i.e., more positive) than convertible bonds in line with few studies in different markets: Japan (Kang, Kim, Park, and Stulz, 1995), the Netherlands (De Roon and Veld, 1998), and German (Gebhardt, 2001). Non-significant abnormal returns of 0.81% and 0.23% on the event window ( 1, 1) are reported for announcements of hybrid securities by means of private placements and rights offerings, respectively, contradict with the ‘certification hypothesis’ of Hertzel and Smith (1993), and ‘signalling hypothesis’ of Heinkel and Schwartz (1986). This chapter also finds that there is no support for ‘information-signalling’ hypothesis (Ross, 1977), as non-significant abnormal returns are observed in the event window ( 1, 1) for announcements of hybrid securities for all purposes of offering (i.e., debt restructuring, mergers and acquisitions, capital expenditure, and working capital). These findings also highlight that listed firms in Malaysia with high risk uncertainty contribute to more negative abnormal returns in comparison to lower risk uncertainty firms, which contradicts with the ‘risk uncertainty hypothesis’. The final study presented in this thesis, Chapter 4, considers the wealth effects of hybrid security announcements in a developed country, the United Kingdom. This third study investigates the wealth effects of announcements of the intention to issue convertible bonds in the UK market over a period from January 1990 until July 2010. The study period also allows for an investigation on the market reaction to announcements of convertible bonds during the financial crisis that started in August 2007. Using the standard event study methodology, a negative abnormal return of 1.75% (significant at the 5% level) on the two-day event window is reported, confirming the findings of previous UK studies (Abyhankar and Dunning, 1999, and Wolf et al., 1999) which are also in line with studies performed using data from other countries such as US, Canada, Australia, and others. There are no significant differences between the results of the sub-samples before and during the financial crisis, suggesting that the economic conditions do not influence the market response. The results of the event study and the multivariate analysis in this chapter are consistent with the ‘market timing hypothesis’ implying that managers in the UK announce their intention to issue convertible bonds after a period of good stock price performance

Wealth Impact of Unit Rights Offerings to Debt Holders: Evidence from Australia

We examine the debt holders\u27 wealth effect of Australian firms and the factors that determine firms\u27 decision to issue unit rights. The sample consists of 638 offerings observations spanning from year 2000 to 2014. Probability of default has been used as the proxy for debt holders wealth. We also use probit model to gauge determinants of firms\u27 choice in issuing unit rights. As the robustness test, logit model was also presented. Aligned with Sequential Financing Hypothesis by Schultz (1993) and Signaling Hypothesis as in Chemmanur and Fulghieri (1997), we find that firms with small size, low issuance proceeds, high risk, low managerial ownership and positive growth prospect tend to issue unit rights. We also obtain findings that support to Leverage Risk Reduction Hypothesis which suggest that debt holders\u27 return is favorably affected by lower financial leverage

A review on Black-Scholes model in pricing warrants in Bursa Malaysia

This paper studies the accuracy of the Black-Scholes (BS) model and the dilution-adjusted Black-Scholes (DABS) model to pricing some warrants traded in the Malaysian market. Mean Absolute Error (MAE) and Mean Absolute Percentage Error (MAPE) are used to compare the two models. Results show that the DABS model is more accurate than the BS model for the selected data

Investigation on firm efficiency: evidence from selected Asia-Pacific countries

Purpose–The purpose of this paper is to examine the firm efficiency or technical efficiency (TE),pure technical efficiency (PTE) and scale efficiency (SE) in the selected developed and developingAsia-Pacific countries.Design/methodology/approach–The sample consists of a sum of 700 firms in selected developed anddeveloping Asia-Pacific countries over the period from 2009 to 2015. The non-parametric data envelopmentanalysis under the production approach is used to investigate firm efficiency.Findings–On average, this paper discovers that the firms in selected Asia-Pacific countries are moderatelyefficient. Scale inefficiency (SIE) is found to be the dominant source of firms’technical inefficiency. Theanalysis of return to scale shows that the large firms tend to operate at decreasing return to scale level, whilethe small firms tend to operate at increasing return to scale level.Practical implications–The findings from this paper provide significant insights to the policy makers andfirm managers in promoting the efficient firms of Asia-Pacific countries.Originality/value–The present paper conducts a critical analysis on return to scale in the firms sector ofAsia-Pacific context, which is ignored by the past studies on firm efficiency since the analysis of return toscale is mostly emphasized on banking sector. The precise nature of SIE is important for a firm to be efficientin achieving the firm’s primary goals of profit maximization and sustaining market competitiveness

How do interest rate changes affect Islamic banks? empirical evidence on Islamic banks in Malaysia

Purpose; Little empirical evidence has showed that financial systems with dual banking systems are relatively more resilience against many financial crises, especially to changes in interest rate levels. In the same vein, this study investigates the impact of interest rates on Malaysian Islamic banks by analysing the relationship between changes in interest rates on Islamic banks' deposits and financing, Design: The objective is investigated using the ARDL bounds test with 144 observations of monthly data from 2007 to 2018. The unit root tests of Augmented Dickey and Fuller (ADF) and the Phillips-Peron (PP) were conducted, followed by the diagnostic tests of serial correlation and heteroscedasticity, and Cumulative Sum of Recursive Residuals or CUSUM and CUSUM Square stability test to ensure robustness of the results. The robustness of the findings is confimed with diagnostic tests. Findings: The study that interest rates have relationship with both deposit and financing of Malaysian Islamic banks in the long runs. This means that in the long run, when interest rates increases, both deposits and financing of an Islamic bank are still increasing. Futhermore, the religious factor is found to play a role in Malaysian's banking decisions. Practical implications: Firstly, the study highlights that the dual banking system is more resilient than the single banking system as the Islamic banking system is not affected by the conventional interbank rates. However, it also provides evidence that Islamic banks are not entirely independent from the effect of conventional interest rates. Therefore, the Islamic banks need to be attentive to interest rates risk in their risk management, as it could influence the value of their assets and obligations. It also highlights the necessary timing for market to revert back for both institutions’ and investors’ discretion. Secondly, due to all reasons above, the Bank Negara Malaysia needs to be cautious in designing monetary policies as such both government and public sectors can strategize the financing of the country. Originality and value: Providing the most recent sets of data, this study is invaluable to the government, public sectors; financial institutions, investor and fellow academicians. It also adds value to Islamic Bank literature

Impact of Chief Executive Officer (CEO) succession policy on CEO turnover announcement in Malaysia

This paper presents a fresh perspective on chief executive officer (CEO) turnover, where the impact of CEO turnover on firm value is analysed based on whether the removal is planned or unplanned. A total of 146 announcements for ten years in Malaysia is examined using an event study method. The results indicate that, in general, CEO turnover announcements cause a significant reaction due to changes in the firm’s investment decisions. Specifically, a significant positive impact exists when CEO turnover occurs as planned. In a planned turnover, the negative news of the removal of the CEO is immediately minimised with the positive news of a CEO appointment, indicating the positive impact of establishing a CEO succession plan on firm value. This finding adds new knowledge to the current literature and allows policymakers to examine the establishment of a CEO succession policy

Drivers of capital structure in Malaysian Real Estate Investment Trust Funds (M-REITs)

This study investigates drivers of capital structure decisions of Malaysian Real Estate Investment Trust Funds (M-REITs) using 121 observations from 15 REITs companies listed in the Bursa Malaysia during 8 years study period of 2011 to 2018. Employing the panel data regression model, the result indicates that operating risk is significantly negatively related to leverage suggesting that M-REIT firms with higher uncertainty of earnings opt for low leverage as it reduces their risk of bankruptcy. Consistent with pecking order theory, profitability is reported to have significantly negatively related to leverage implying that M-REITs with higher (lower) profits have lower (larger) debt albeit this industry is expected to have low retained earnings. Contrary to the trade-off theory, the asset tangibility is significantly negatively related to leverage indicating that M-REITs with higher fixed assets opt for lower debt. The uniqueness of M-REIT regulation could be the justification for this result

Value of CEO succession policy on CEO transition

Chief Executive Officer (CEO) transition is a continuous process of change in leadership involving removal of existing CEO and replacement of new CEO. Ideally, CEO transition occurs based upon the CEO Succession Policy developed by the Board of Directors. The CEO succession plan and policy is important because it reduces the impact of a CEO's sudden removal on the firm. In recent time, there is an immense increase in CEO transition recorded among emerging economy, nonetheless, the issue has not been well addressed in the literature. Disclosure policy in Malaysia also views change of CEO as an important element that will have an impact ont he firm value. To evaluate the CEO succession policy, this study investigates the effect of CEO transition announcement on the share price. This study adopts the event study method and employs two estimation models for expected return, which are Market Model (MM) and Capital Asset Pricing Model (CAPM).This study examines the simultaneous announcement, which indicates the adoption of succession policy, as well as the announcement of CEO appointment and CEO turnover. A total of354 announcements of CEO transition from 170 firms listed on Bursa Malaysia, over the duration of ten years from 2007-2016is observed. The result indicates that the firm’s share price generally reacts towards all types of CEO transition announcement, with a stronger reaction significantly observed through the simultaneous announcement. Further robustness check with regression analysis confirms that when the CEO transition announcement is simultaneous, it creates more value to the firm. In other words, the CEO succession policy, where proper CEO transition takes place, eliminates the uncertainty and risk, hence, giving a positive impact on firm value. This finding also contributes to the signalling theory literature, where anticipated event induces a positive reaction from investors, as reflected in the firm share price

Firm efficiency in selected developed and developing East Asia countries: using data envelopment analysis

Drawing on the significance of firm efficiency in attaining the primary firms’ goal of profit maximization, the paper aims to examine the firm efficiency or technical efficiency (TE), pure technical efficiency (PTE) and scale efficiency (SE) level in the selected East Asia countries during the period of 2009-2015, by employing the non-parametric Data Envelopment Analysis (DEA) based on the production approach. The efficiency level of firms in selected East Asia countries is found to be moderate, by experiencing the mean TE of 53.40per cent with input waste of 46.60per cent during the years 2009-2015. The paper find that the scale inefficiency (SIE) is the dominant source of inefficiency of firms. Furthermore, the paper reveals that the large firms are generally showed decreasing return to scale (DRS); while the small firms are commonly exhibited increasing return to scale (IRS). Finally, the paper concludes that the firms in selected developed countries are found to exhibit higher mean TE than those firms in selected developing countries