Financial Markets and Portfolio Management

, Volume 29, Issue 1, pp 61–79 | Cite as

Calls of convertible debt securities: no bad news at all

  • Tobias NigburEmail author


In this paper, I examine the impact of in-the-money convertible bond calls on stock prices, employing a sample of US convertible bond calls over the period 1994–2011. In contrast to previous literature, I find that conversion-forcing convertible bond calls do not significantly influence stock prices. I posit that the discrepancy between my results and those in the literature is caused by amplified screening criteria, especially strong news cleaning. Companies tend to announce calls as side notes to other major corporate news, resulting in an event-study bias. Further, convertible bond design, moneyness of the conversion option at the announcement date, and convertible-arbitrage strategies cast doubt on the negative abnormal returns reported by previous literature.


Conversion-forcing convertible bond calls Event study 

JEL Classification

G14 G32 



I thank Björn Imbierowicz and the participants of the Campus for Finance Conference at the WHU in Vallendar and participants at the Topics in Finance seminar at the University of St. Gallen, especially Tatjana Berg, for helpful comments and suggestions.


  1. Agarwal, V., Fung, W.H., Loon, Y.C., Naik, N.Y.: Risk and return in convertible arbitrage: evidence from the convertible bond market. J. Empir. Finance 18, 175–194 (2011)CrossRefGoogle Scholar
  2. Amihud, Y.: Illiquidity and stock returns: cross-section and time-series effects. J. Financ. Mark. 5, 31–56 (2002)CrossRefGoogle Scholar
  3. Andrews, D.W.K., Buchinsky, M.: Evaluation of a three-step method for choosing the number of bootstrap repetitions. J. Econom. 103, 345–386 (2001)CrossRefGoogle Scholar
  4. Bajo, E.: The information content of abnormal trading volume. J. Bus. Finance Account. 37, 950–978 (2010)CrossRefGoogle Scholar
  5. Bajo, E., Barbi, M.: The role of time value in convertible bond call policy. J. Bank. Finance 36, 550–563 (2012)CrossRefGoogle Scholar
  6. Bechmann, K.L.: The difference between out-of-the-money and in-the-money convertible bond calls. Working paper Copenhagen Business School (2001)Google Scholar
  7. Bechmann, K.L.: Short sales, price pressure, and the stock price response to convertible bond calls. J. Financ. Mark. 7, 427–451 (2004)CrossRefGoogle Scholar
  8. Biktimirov, E.N., Cowan, A.R., Jordan, B.D.: Do demand curves for small stocks slope down? J. Financ. Res. 27, 161–178 (2004)CrossRefGoogle Scholar
  9. Brennan, M.J., Schwartz, E.S.: Convertible bonds: valuation and optimal strategies for call and conversion. J. Finance 32, 1699–1715 (1977)CrossRefGoogle Scholar
  10. Brick, I.E., Palmon, O., Patro, D.K.: Stock price response to calls of convertible bonds: still a puzzle? Financ. Manag. 36, 1–21 (2007)CrossRefGoogle Scholar
  11. Brown, S.J., Grundy, B.D., Lewis, C.M., Verwijmeren, P.: Convertible and hedge funds as distributors of equity exposure. Rev. Financ. Stud. 25, 3077–3112 (2012)CrossRefGoogle Scholar
  12. Byrd, A.K., Moore, W.T.: On the information content of calls of convertible securities. J. Bus. 69, 89–101 (1996)CrossRefGoogle Scholar
  13. Cowan, A.R., Nayar, N., Singh, A.K.: Stock returns before and after calls of convertible bonds. J. Financ. Quant. Anal. 25, 549–554 (1990)CrossRefGoogle Scholar
  14. Dann, L.Y., Mikkelson, W.H.: Convertible debt issuance, capital structure change and financing-related information: some new evidence. J. Financ. Econ. 13, 157–186 (1984)CrossRefGoogle Scholar
  15. Davison, A.C., Hinkley, D.V.: Bootstrap methods and their application, Cambridge University Press (1997)Google Scholar
  16. de Jong, A., Dutordoir, M., van Genuchten, N., Verwijmeren, P.: Convertible arbitrage price pressure and short-sale constraints. Financ. Anal. J. p. 68 (2012)Google Scholar
  17. Ederington, L.H., Goh, J.C.: Is a convertible bond call really bad news? J. Bus. 74, 459–476 (2001)CrossRefGoogle Scholar
  18. Fama, E.F.: Efficient capital markets: a review of theory and empirical work. J. Finance 25, 383–417 (1970)CrossRefGoogle Scholar
  19. Fama, E.F., French, K.R.: Common risk factors in the returns on stocks and bonds. J. Financ. Econ. 33, 3–56 (1993)CrossRefGoogle Scholar
  20. Garcia-Feijóo, L., Beyer, S., Johnson, R.R.: Risk changes around calls of convertible bonds. Financ. Rev. 45, 541–556 (2010)CrossRefGoogle Scholar
  21. Harris, M., Raviv, A.: A sequential signaling model of convertible debt call policy. J. Finance 40, 1263–1281 (1985)CrossRefGoogle Scholar
  22. Ingersoll, J.E.: A contingent-claims valuation of convertible securities. J. Financ. Econ. 4, 289–321 (1977)CrossRefGoogle Scholar
  23. King, T.-H.D., Mauer, D.C.: Determinants of corporate call policy for convertible bonds. J. Corp. Finance 24, 112–134 (2014)CrossRefGoogle Scholar
  24. Lewis, C.M., Rogelski, R.J., Seward, J.K.: Is convertible debt a substitute for straight debt or for common equity? Financ. Manag 28, 5–27 (1999)CrossRefGoogle Scholar
  25. Lewis, C.M., Rogelski, R.J., Seward, J.K.: The long-run performance of firms that issue convertible debt: an empirical analysis of operating characteristics and analyst forecasts. J. Corp. Finance 7, 447–474 (2001)CrossRefGoogle Scholar
  26. Lewis, C.M., Rogelski, R.J., Seward, J.K.: Risk changes around convertible debt offerings. J. Corp. Finance 8, 67–80 (2002)CrossRefGoogle Scholar
  27. Maquieira, C.P., Megginson, W.L., Nail, L.: Wealth creation versus wealth redistributions in pure stock-for-stock mergers. J. Financ. Econ. 48, 3–33 (1998)CrossRefGoogle Scholar
  28. Mayers, D.: Why firms issue convertible bonds: the matching of financial and real investment options. J. Financ. Econ 47, 83–102 (1998)CrossRefGoogle Scholar
  29. Mazzeo, M.A., Moore, W.T.: Liquidity costs and stock price response to convertible security calls. J. Bus. 65, 353–369 (1992)CrossRefGoogle Scholar
  30. McWilliams, A., Siegel, D.: Event studies in management research: theoretical and empirical issues. Acad. Manag. J. 40, 626–657 (1997)Google Scholar
  31. Mikkelson, W.H.: Convertible calls and security returns. J. Financ. Econ. 9, 237–264 (1981)CrossRefGoogle Scholar
  32. Mitchell, M., Pedersen, L.H., Pulvino, T.: Slow moving capital. NBER Working Paper, p. 12877 (2007)Google Scholar
  33. Nash, R.C., Netter, J.M., Poulsen, A.B.: Determinants of contractual relations between shareholders and bondholders: investment opportunities and restrictive covenants. J. Corp. Finance 9, 201–232 (2003)CrossRefGoogle Scholar
  34. Ofer, A.R., Natarajan, A.: Convertible call policies: An empirical analysis of an information-signaling hypothesis. J. Financ. Econ. 19, 91–108 (1987)CrossRefGoogle Scholar
  35. Stein, J.C.: Convertible bonds as backdoor equity financing. J. Financ. Econ. 32, 3–21 (1992)CrossRefGoogle Scholar

Copyright information

© Swiss Society for Financial Market Research 2015

Authors and Affiliations

  1. 1.University of St. GallenSt. GallenSwitzerland

Personalised recommendations