Abstract
We study mandatory exchangeable debt offerings. A firm that issues mandatory exchangeable debt requires bondholders to exchange their bonds for shares of the underlying firm in which the issuing firm has a stake. We find significant announcement (−3.3%) and long-run (−13%) abnormal price declines for underlying companies. The evidence is consistent with the hypothesis that mandatory exchangeable debt issuers exploit private information that they possess to issue mandatory exchangeable debt when the underlying stock is overvalued.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
Notes
Gentry and Schizer (2002) examine publicly traded exchangeable debt between 1992 and 2000, but their sample also included non-mandatory exchangeable debt with principal protection and trust structures.
We conduct an alternative test for the supply effect explanation. We conjecture that demand for an underlying firm’s shares is less elastic for smaller firms and for firms with fewer institutional owners. We split the sample in to two subsamples according to one of these two characteristics. We run a Chow test to examine whether announcement returns vary between the subsamples. We use both equal- and value-weighted returns. In results not reported here, the F-statistic is insignificant for all eight subsamples. However, for institutional ownership based subsamples, in four out of eight tests, the F-statistic was significant at the ten percent level. That is, the relation between the announcement abnormal return and the relative size of the mandatory exchangeable issue does not depend on the firm’s size, but there is some evidence that it depends on institutional ownership. In particular, more negative abnormal returns are documented for MED announcements with a larger proportion of institutional investors. These results provide at most mixed support for a supply effect explanation for observed negative announcement returns.
Unfortunately there is no public information available regarding possible searches of prospective buyers. So, issuers could have issued mandatory exchangeable debt because either it was their first choice of block disposition or because they failed to find any interested party for a block sale.
We acknowledge that the very small sample size is problematic for making unambiguous statistical inferences.
References
Barber, B. (1993). Exchangeable debt. Financial Management, 22(2), 48–60.
Barclay, M., & Holderness, C. (1989). Private benefits from control of public corporations. Journal of Financial Economics, 25(2), 371–395.
Carhart, M. (1997). On persistence in mutual fund performance. Journal of Finance, 52(1), 57–82.
Clarke, J., Dunbar, C., & Kahle, K. (2004). The long-run performance of secondary equity issues: A test of the windows of opportunity hypothesis. Journal of Business, 77(3), 575–603.
Fama, E., & French, K. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33(1), 3–56.
Fama, E., & Jensen, M. (1983). Separation of ownership and control. Journal of Law and Economics, 26(2), 301–325.
Gentry, W. & Schizer, D. (2002). Frictions and tax-motivated hedging: An empirical exploration of publicly-traded exchangeable debt. NBER Working Paper 9243.
Ghosh, C., Varma, R., & Woolridge, J. (1990). An analysis of exchangeable debt offers. Journal of Financial Economics, 28(1–2), 251–263.
Mikkelson, W., & Partch, M. (1985). Stock price effects and costs of secondary distributions. Journal of Financial Economics, 14(2), 165–194.
Mikkelson, W. & Ruback, R. (1988). Targeted repurchases and common stock returns. Harvard business school working paper 89–029.
Mitchell, M., & Stafford, E. (2000). Managerial decisions and long-term stock price performance. Journal of Business, 73(3), 287–329.
Scholes, M. (1972). The market for securities: Substitution versus price pressure and the effects of information on share prices. Journal of Business, 45(2), 179–211.
Shleifer, A., & Vishny, R. (1986). Large shareholders and corporate control. Journal of Political Economy, 94(3 Part1), 461–488.
Acknowledgements
A. Danielova appreciates funding provided by the Social Sciences & Humanities Research Council (SSHRC) of Canada and the Arts Research Board of McMaster University.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Danielova, A.N., Smart, S.B. Stock Price Effects of Mandatory Exchangeable Debt. Int Adv Econ Res 18, 40–52 (2012). https://doi.org/10.1007/s11294-011-9337-9
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11294-011-9337-9