Abstract
<p>This paper examines the impact of convertible debt design on the long-run stock price performance of the issuing firms in France. More specifically, we divide French convertible bonds (CBs) into three categories; namely, debt-like, mixed, and equity-like CBs, based on their total conversion probability, which integrates the possibility of early exercise of the call feature. In line with previous empirical studies, our results show that French CB issuers experience a substantial increase in their stock price profitability before the offering followed by significant under-performance over the three year post-issue event window. However, the breakdown of our sample into three groups of CBs depending on their design reveals, on one hand, a strong evidence of stock price run-up before the offering only for equity-like and mixed CBs. On the other hand, the post-issue performance is worse only for equity-like issuers, indicating that the post-issue performance is poorer the more the convertible debt issuer's stock is over-valued prior to the offering. This finding is consistent with the market timing hypothesis.</p>
Highlights
C onvertible debt is a hybrid security which has both equity and straight debt characteristics
Unlike previous studies on the design of convertible debt (e.g., Burlacu, 2000; Lewis et al, 2003; Dutordoir & Van de Gucht, 2007; Lee et al, 2009), our classification of convertible bonds (CBs) is not based on the probability that the bond will be converted into equity at maturity, as computed using the standard BlackScholes model, but rather using the total conversion probability derived from André-Le Pogamp and Moraux (2004)’s valuation method of callable CBs
Consistent with previous empirical evidence (e.g., Lee & Loughran, 1998; Spiess & Affleck-Graves, 1999), we find that CB issuers experience a significant downturn in their stock price and operating performance following the offering
Summary
C onvertible debt is a hybrid security which has both equity and straight debt characteristics. Lewis et al (1999, 2003), amongst other authors, found that firms design CBs to mitigate different costs of external financing These studies document a significant variation in the market response to the announcement of new CB issues depending on whether investors perceive the CB as a debt-like, mixed or equity-like security. Consistent with previous empirical evidence (e.g., Lee & Loughran, 1998; Spiess & Affleck-Graves, 1999), we find that CB issuers experience a significant downturn in their stock price and operating performance following the offering. Further analysis of the issuers’ performance based on whether the CB was designed as equity-, mixed or debt-like security reveals that the behaviour of the long-run stock price and operating performance differs across these issuer classes.
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