Is a Convertible Bond Call Really Bad News?
The article tests and rejects the hypothesis that managers call in-the-money convertibles when they view a decline in the value of the firm as likely. Inconsistent with this view, it finds that insiders generally buy equity before conversion-forcing calls. Also, analysts tend to raise their earnings forecasts following a call. There is no evidence that earnings analysts interpret a conversion-forcing call as bad news. Indeed there is evidence that, relative to firms in general, analysts are revising their earnings forecasts upward in the months surrounding conversion-forcing calls. The article concludes that an announcement of a conversion-forcing call of a firm's convertible bonds is accompanied by a small decline in the price of the firm's common equity.
Finance and Financial Management | Portfolio and Security Analysis
Journal of Business
University of Chicago
EDERINGTON, Louis H. and GOH, Jeremy C..
Is a Convertible Bond Call Really Bad News?. (2001). Journal of Business. 74, (3), 459-476. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/2203