Is a convertible bond call really bad news?

• Main Authors: EDERINGTON, Louis H., GOH, Jeremy C.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2001
• Subjects: Finance and Financial Management; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/2203; https://ink.library.smu.edu.sg/context/lkcsb_research/article/3202/viewcontent/Convertible_Bond_Call_Really_Bad_News.pdf
• Institution: Singapore Management University

The article tests and rejects the hypothesis that managers call in-the-money convertibles when they view a decline in the value of the firm as likely. Inconsistent with this view, it finds that insiders generally buy equity before conversion-forcing calls. Also, analysts tend to raise their earnings forecasts following a call. There is no evidence that earnings analysts interpret a conversion-forcing call as bad news. Indeed there is evidence that, relative to firms in general, analysts are revising their earnings forecasts upward in the months surrounding conversion-forcing calls. The article concludes that an announcement of a conversion-forcing call of a firm's convertible bonds is accompanied by a small decline in the price of the firm's common equity.