Abstract
We assess market valuation of airline convertible preferred stocks using a contingent claims valuation model that was extensively tested by Ramanlal et al. (Rev Quant Financ Account 10:303–319, 1998). Our sample consists of 4,096 daily price observations of 11 convertible preferred stocks issued by the U.S. airlines in 1980–1991. For each convertible we estimate daily model prices for 2 years after issuance and compare them with market prices by calculating pricing errors. While the entire sample’s mean pricing error is found to be negative 3.8%, the panel data analysis and the mean pricing errors of the sub-samples indicate that the undervaluation is much more severe in the first 6 months of trading. The results suggest that airlines leave about 10% on the table when they raise capital by issuing convertible securities.
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Notes
In January 2007 according to Standard and Poor among major U.S. airlines only Southwest Airlines had an investment grade credit rating.
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Guzhva, V.S., Beltsova, K. & Golubev, V.V. Market undervaluation of risky convertible offerings: Evidence from the airline industry. J Econ Finance 34, 30–45 (2010). https://doi.org/10.1007/s12197-007-9015-1
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DOI: https://doi.org/10.1007/s12197-007-9015-1