Calls of Out-of-the-Money Convertible Bonds

Arnold Cowan (), Nandkumar Nayar and Ajai K. Singh

Financial Management, 1993, vol. 22, issue 4

Abstract: We examine calls of convertible bonds in which the effective cash call price exceeds the value of the common stock into which investors can convert the bond. In option pricing terms, the conversion option available to the convertible bondholder is out-of-the-money. Following the announcement of out-of-the-money calls, the common stock prices of the firms calling their convertible bonds increase an average of 1.43%. The increase occurs over the two-day period in which the firm announces the call, and reflects adjustments for the risk of the stock and market wide price movements.

Date: 1993
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