Operating Performance and Stock Returns of Firms Calling Convertible Preferred Stocks

Palani‐Rajan Kadapakkam, Huey‐Lian Sun and Alex P. Tang

Journal of Business Finance & Accounting, 2004, vol. 31, issue 9‐10, 1559-1576

Abstract: Abstract: Using methodologies developed by Barber and Lyon (1996 and 1997), we examine the long‐run operating performance and stock returns of firms around in‐the‐money calls of convertible preferred stock. Our study intends to be a direct test of the hypothesis that managers call in‐the‐money convertibles when they view a decline in the firms’ performance. We find no evidence that calling firms underperform non‐calling benchmark firms. On the contrary, we find mild evidence that the post‐call operating performance of calling firms is better than a carefully selected group of benchmark firms and call firms’ post‐call stock returns are no worse than benchmark firms.

Date: 2004
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