Abstract
Calling firms experience increases in systematic business risk following conversion-forcing calls of convertible debt. The increases in business risk are sufficiently large to offset the reductions in financial risk coming from the reduction in financial leverage following the call. As a result, there appear to be no significant changes in the systematic equity risk of the calling firms for the full sample. However, highly levered firms that significantly lower their financial leverage subsequent to the call experience increases in systematic business risk and equity risk following the call. These firms also experience the fastest industry-adjusted growth in capital expenditures surrounding the call, negative but temporary abnormal returns at call announcement, and positive and significant industry-adjusted operating performance following the call. Overall, our findings shed new light on the relevance of existing theories on convertible bonds. Moreover, they suggest that it is important to recognize heterogeneity within the convertible bond caller universe.
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