Long-Run Abnormal Performance Following Convertible Security Issues: New Evidence from the UK

Abstract

We study the long-run abnormal performance of a sample of UK firms following convertible security issues over the period 1982-1996. We make the following contributions relative to prior research. We are the first to study long-run stock price performance of firms following convertible preference share issues. Our data set has been extracted from original sources and thus mitigates to some extent concerns about data-snooping biases. Second, we study long-run abnormal performance both prior to and following the issue of convertible bonds and convertible preference shares. Our research complements previous research on announcement day wealth effects. Third, we apply a range of metrics to assess the robustness of long-run abnormal performance. We find significant evidence of negative post-offer abnormal performance using buy-and-hold abnormal returns calculated relative to a stock index and a size/book-to-market matched portfolio. However, using a calendar-time approach with the Fama-French three-factor and the Carhart four-factor model, the significance of the abnormal performance decreases. Finally, using a conditional asset pricing model, we find that the unconditional abnormal return following convertible preference share issues fades away. Our results show that estimates of long-run abnormal returns are sensitive to the methodology used and are not a stylised feature of our data.