Convertible bond announcement returns, capital expenditures, and investment opportunities: Evidence from Korea

Abstract

This study examines convertible bond issue announcement effects in Korea from 2000 to 2015. Our empirical results show that convertible bond issues have significantly positive cumulative abnormal returns (CARs) around the announcement. In particular, issuing firms that state capital expenditure as the use of proceeds have significantly higher CARs compared to firms that state other purposes. We find that such firms actually increase their expenses for capital expenditure after offering convertibles, and suggest that the market reacts positively to these issues due to the high expectation of investment in the near future. We also find consistent results using propensity score matching to address potential endogeneity concerns. In addition, we find that CARs are more likely to be positive for smaller firms where asymmetric information occurs more from the new investment opportunities than from the assets-in-place, which is consistent with the generalized Myers-Majluf model. Overall, our empirical results suggest that the key factors of convertible bond announcement effects in Korea are the stated use of proceeds as capital expenditure and the asymmetric information effect from investment opportunities.