Tax Shields, Sample-Selection Bias, and the Information Content of Conversion-Forcing Bond Calls

Cynthia J Campbell, Louis H Ederington and Prashant Vankudre

Journal of Finance, 1991, vol. 46, issue 4, 1291-1324

Abstract: The information content of conversion-forcing bond calls depends on the after-tax cash flow to bondholders. If the dividend after conversion exceeds the after-tax coupon but is less than the before-tax coupon, the call reveals unanticipated decreases in dividends and/or earnings that reduce the tax shield from interest payments. In contrast, a call when the dividend is less than the after-tax coupon reveals the timing of an anticipated shift from exceptional firm-specific positive growth to the industry norm. Efforts to document properties of convertible calls are subject to sample-selection bias because calls are disproportionately associated with positive pre-call firm-specific growth. Copyright 1991 by American Finance Association.

Date: 1991
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