Informative Conversion Ratios: A Signalling Approach

Yong O. Kim

Journal of Financial and Quantitative Analysis, 1990, vol. 25, issue 2, 229-243

Abstract: The paper uses a signalling equilibrium to explain the market's reaction to the announcement of a firm's financing decision. In our model, a firm can issue one of the following securities: convertible debt with a different conversion ratio, straight debt, and stock. We identify conditions under which the conversion ratio of a convertible debt issue serves as a credible signal of a firm's private information, given the continuous distribution of attributes (information) across firms. In this signalling equilibrium, we find that the lower the expected future earnings, the higher the conversion ratio of a convertible debt issue. At the limit, firms that expect the highest earnings will use straight debt financing, and firms that expect the lowest earnings will use equity financing. Based on the signalling equilibrium, we predict that at announcement of a convertible debt issue, negative abnormal common stock return increases in absolute value with the conversion ratio.

Date: 1990
References: Add references at CitEc
Citations: View citations in EconPapers (17)

Downloads: (external link)
https://www.cambridge.org/core/product/identifier/ ... type/journal_article link to article abstract page (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cup:jfinqa:v:25:y:1990:i:02:p:229-243_00

Access Statistics for this article

More articles in Journal of Financial and Quantitative Analysis from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK.
Bibliographic data for series maintained by Kirk Stebbing ().