Market Reaction to Convertible Bond Announcements by the Western European Companies: Normal Versus Crisis Periods

Olivier Adoukonou (), Jean-Laurent Viviani () and Florence André-Le Pogamp ()
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Olivier Adoukonou: LEGO - Laboratoire d'Economie et de Gestion de l'Ouest - UBS - Université de Bretagne Sud - UBO - Université de Brest - IMT - Institut Mines-Télécom [Paris] - IBSHS - Institut Brestois des Sciences de l'Homme et de la Société - UBO - Université de Brest - UBL - Université Bretagne Loire - IMT Atlantique - IMT Atlantique - IMT - Institut Mines-Télécom [Paris]
Jean-Laurent Viviani: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique
Florence André-Le Pogamp: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper focuses on the determinants of the market reaction to convertible bonds announcement between 1990 and 2021 in the Western European markets. The results show that the market does not integrate the potential of the CB to reduce agency and adverse selection costs. Announcement abnormal returns are explained by the investors' suspicion relative to the possibility that the issuer is overvalued and that suspicion is exacerbated during the financial crises. This result is in line with the predictions of Myers and Majluf (1984). However, part of the market reaction seems to be explained by the short-sales activities of arbitrageurs on the issuers' stocks. Indeed, firms that are short-sale constrained incur less negative market reaction.

Keywords: convertible bonds; financial crisis; wealth effect (search for similar items in EconPapers)
Date: 2022-05-23
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Published in 38th International Conference of the French Finance Association, French Finance Association, May 2022, Saint-Malo, France

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04059884

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