The signaling effects associated with convertible debt design

Mookwon Jung and Michael J. Sullivan

Journal of Business Research, 2009, vol. 62, issue 12, 1358-1363

Abstract: In this paper we investigate whether the terms used in the design of a convertible debt issue act as a signal of the issuing firm's future growth prospects. Our general premise is that convertible debt design terms are interrelated and arranged in a manner that signals asymmetric information to market participants. Empirical tests support our hypothesis, even after controlling for risk, firm size, time-to-maturity, and industry effects. Firms issuing convertible debt that arrange terms to take advantage of relatively better future growth prospects are found to have a relatively lower negative price reaction around the announcement of the offer.

Keywords: Market; efficiency; Convertible; debt; Asymmetric; information; Signaling (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbrese:v:62:y:2009:i:12:p:1358-1363

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