Why are conversion-forcing call announcements associated with negative wealth effects?
Bruce D. Grundy,
Chris Veld (),
Patrick Verwijmeren and
Journal of Corporate Finance, 2014, vol. 24, issue C, 149-157
We analyze call announcement returns taking into account two recent developments in the convertible bond market: the inclusion of dividend protection clauses in convertibles' terms, and the high fraction of convertible issues purchased by hedge funds. Calls of dividend-protected convertible bonds are predictable, yet we still observe a negative stock price reaction that cannot be explained by signaling. Greater hedge fund involvement prior to a call means less short selling in response to the call and we document a reduced price reaction. We conclude that price pressure and not signaling underlies the negative announcement effect of convertible bond calls.
Keywords: Convertible call announcement effects; Signaling; Price pressure; Dividend protection; Hedge funds (search for similar items in EconPapers)
JEL-codes: G30 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:24:y:2014:i:c:p:149-157
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