The Long-Run Performance Following Convertible Debt Offerings: Does The Design Matter?

Khalid Elbadraoui () and Jamal Ouenniche
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Khalid Elbadraoui: ESC Rennes School of Business - ESC [Rennes] - ESC Rennes School of Business, 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
Jamal Ouenniche: The University of Edinburgh, ESC Rennes School of Business - ESC [Rennes] - ESC Rennes School of Business

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Abstract: This paper examines the impact of convertible debt design on the long-run stock price performance of the issuing firms in France. More specifically, we divide French convertible bonds (CBs) into three categories; namely, debt-like, mixed, and equity-like CBs, based on their total conversion probability, which integrates the possibility of early exercise of the call feature. In line with previous empirical studies, our results show that French CB issuers experience a substantial increase in their stock price profitability before the offering followed by significant under-performance over the three year post-issue event window. However, the breakdown of our sample into three groups of CBs depending on their design reveals, on one hand, a strong evidence of stock price run-up before the offering only for equity-like and mixed CBs. On the other hand, the post-issue performance is worse only for equity-like issuers, indicating that the post-issue performance is poorer the more the convertible debt issuer's stock is over-valued prior to the offering. This finding is consistent with the market timing hypothesis.

Keywords: Convertible Bonds; Stock Price Performance; Security Design; Operating Performance (search for similar items in EconPapers)
Date: 2014
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Published in Journal of Applied Business Research, 2014, 30 (3), pp.online review. ⟨10.19030/jabr.v30i3.8573⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-01246435

DOI: 10.19030/jabr.v30i3.8573

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