Debt Offerings Research Articles

The Stock Price Effect of Risky Versus Safe Debt

This paper tests whether there is a difference in the stock price reactions to industrial straight debt offerings of different risk. Using bond ratings at the time of announcement as a measure of risk, we find that there is no monotonic relation between stock price impact and rating and no statistically significant difference across risk classes, even though the sample includes low-rated debt issues from recent years. This confirms earlier evidence on straight debt issues, but differs from the evidence on convertible securities. The paper also finds that the results for straight debt are not affected by shelf registrations or by the issuing firms' involvement in merger and acquisition-related activity.

Valuation Effects of Cancelled Debt Offerings

We examine the price behavior of the firm's common stock associated with cancelled straight debt offerings. Excluding utilities, we find negative excess returns associated with offering and cancellation announcements. Further, the stronger withdrawal reactions we find, when the funds were to be used for capital expenditures, may signal a decline in profitable investment opportunities. These results are consistent with Miller and Rock's (1985) hypothesis.

Pollution control revenue bond sales and public utility share prices

This article examines the effect of pollution control revenue bond offerings on public utility common stock prices. These securities provide a unique case in which public utilities were permitted to issue a limited quantity of debt offerings investors an income stream exempt from federal taxes with the proceeds from the issue targeted for a specific capital investment. Significant negative stock price effects are reported around the announcement of these securities. However, the stock price response to pollution control revenue bond sales is more favorable than that reported in earlier studies for straight debt offerings used to finance a utility's investment program.

Valuation Effects of Initial Corporate Debt Offerings

Valuation Effects of Initial Corporate Debt Offerings

Market Uncertainty and the Least-Cost Offering Method of Public Utility Debt: A Note

THE CHOICE OF OFFERING method, competitive bidding or negotiated offering, for the issuance of new securities by public utilities is subject to approval by its regulators. The Securities and Exchange Commission (SEC) regulates security issuance by utility holding companies as stipulated by the Public Utility Holding Company Act of 1935. Rule 50 requires that, unless a waiver is granted, sales of all securities of a holding company or subsidiary company be accomplished through competitive bidding procedures. The Federal Energy Regulatory Commission (FERC) requires competitive bidding on all new securities issued by electric utilities.' Each state regulatory agency can formulate its own policy concerning security issuance. Most states that have the legal authority to require competitive bidding do require it. A fair conclusion of the prevailing regulatory environment is that regulators believe that competitive bidding will lead to lower overall interest cost. Three recent studies have investigated this question. Based on a pooled sample of industrial and public utility debt offerings for the period January 1974 to April 1978, Sorensen [5] found that competitive bidding leads to a significantly lower overall interest cost compared with negotiated offerings. In contrast, Parker and Cooperman [3], using a sample of public utility debt offerings issued between 1970 and 1974, found that competitive bidding did not necessarily result in lower cost. Fabozzi and West [1] resolve these two seemingly conflicting findings using a sample of public utility debt offerings for the period 1974 through 1976. They demonstrate that the appropriate comparison is not between negotiation and competitive bidding, per se, but rather between negotiation and the intensity of bidding competition [1, p. 324]. In addition, they show that the general level of uncertainty must be considered in investigating the least-cost offering method. In doing so, they develop a measure to proxy for market uncertainty. The purpose of this note is to provide additional empirical evidence on the importance of market uncertainty in the method of offering controversy using a sample from a more recent time period that includes a more volatile interest rate environment than in previous studies. To investigate this issue, we employ a new measure of market uncertainty as well as the measure developed by Fabozzi and West.

Some evidence on the uniqueness of bank loans

This paper presents evidence that banks provide some special service with their lending activity that is not available from other lenders. I find evidence that bank borrowers, not CD holders, bear the cost of reserve requirements on CDs. In addition, I find a positive stock price response to the announcement of new bank credit agreements that is larger than the stock price response associated with announcements of private placements or public straight debt offerings. Finally, I find significantly negative returns for announcements of private placements and straight debt issues used to repay bank loans.

Valuation effects of corporate debt offerings

This paper analyzes the effect of corporate debt offerings on stock prices. Straight debt offerings have non-positive price effects, while convertible debt offerings have significantly negative effects. Public utility mortgage (non-convertible) bond offerings have marginally negative effects, and the effect is significantly negative when the proceeds are used to finance the utility's investment program. Cross-sectional regressions reveal no relation between offer-induced price effects and offering size, rating, post-offer changes in abnormal earnings or debt-related tax shields. The evidence is inconsistent with theories predicting that the price effects of capital structure changes go in the direction of the leverage change.

Convertible debt issuance, capital structure change and financing-related information

This paper provides evidence on the valuation effects of convertible debt issuance. Common stockholders earn significant negative abnormal returns at the initial announcement of a convertible debt offering, and also at the issuance date. In contrast, the average valuation effect on common stock at the announcement of non-convertible debt offerings is only marginally negative, and is zero at issuance. The significant negative average effect on common stock value appears not to be systematically related to either the degree of leverage change induced by the convertible debt issuance or the extent to which the proceeds from issuance are used for new investment or to refinance existing debt. If, as appears likely, the issuance of convertible debt on average increases financial leverage, these results are inconsistent with evidence from other recent studies documenting common stock price effects of the same sign as the change in leverage. The evidence suggests that convertible debt offerings convey unfavorable information about the issuing firms, but the specific nature of such information remains unidentified.

THE INTERACTION BETWEEN PRICING AND UNDERWRITING SPREAD IN THE NEW ISSUE CONVERTIBLE DEBT MARKET

AbstractThe objective of this research is to measure the interaction among pricing variables in new issues of convertible debt. In underwriting convertible debt issues, there is a simultaneous tradeoff among the conversion premium, yield, and underwriting spread. Since the three endogenous variables are interrelated, a simultaneous equation model is used to test for this interaction. Based on a sample of 264 new convertible debt offerings, the results indicate underpricing in terms of conversion premium and yield as well as simultaneous increases in yield and underwriting spread.

Market Timing Strategies in Convertible Debt Financing

DESPITE THE CONSIDERABLE ATTENTION paid to pricing of new security issues [1, 7, 8, 18], relatively little research has focused on the timing of such offerings. Investment bankers appear to advise their clients that it is advantageous to their securities in issue markets, in which a hot market is defined as a period when new issues exhibit higher than average rates of return relative to the entire market.1 Ibbotson and Jaffe [8] examined the unseasoned common stock market and concluded that issuers should avoid such hot markets. Our study analyzes whether similar market-related strategies, such as issuing in hot or cold markets, apply to convertible debt offerings. First, the predictability of hot markets in convertible debt is investigated. Whether managements tend to use market conditions as a major determinant in their approach to timing their offerings is also examined. Finally the question of the advantages of market timing is discussed. The following section describes the convertible debenture sample and the methodology used in this study. The methodology utilizes residual analysis to control for general market conditions when examining price behavior. Three different approaches for removing market effects are used. The results of the empirical analysis are presented in Section III. Finally, Section IV summarizes the results and the implications of this study for convertible debt financing.

MARKET TIMING STRATEGIES IN CONVERTIBLE DEBT FINANCING

DESPITE THE CONSIDERABLE ATTENTION paid to pricing of new security issues [1, 7, 8, 18], relatively little research has focused on the timing of such offerings. Investment bankers appear to advise their clients that it is advantageous to their securities in issue markets, in which a hot market is defined as a period when new issues exhibit higher than average rates of return relative to the entire market.1 Ibbotson and Jaffe [8] examined the unseasoned common stock market and concluded that issuers should avoid such hot markets. Our study analyzes whether similar market-related strategies, such as issuing in hot or cold markets, apply to convertible debt offerings. First, the predictability of hot markets in convertible debt is investigated. Whether managements tend to use market conditions as a major determinant in their approach to timing their offerings is also examined. Finally the question of the advantages of market timing is discussed. The following section describes the convertible debenture sample and the methodology used in this study. The methodology utilizes residual analysis to control for general market conditions when examining price behavior. Three different approaches for removing market effects are used. The results of the empirical analysis are presented in Section III. Finally, Section IV summarizes the results and the implications of this study for convertible debt financing.

Determinants of Risk Premiums on Corporate Bonds

ECONOMISTS have long agreed that the rate of interest on a loan depends on the risks the lender incurs. But how lenders estimate these risks has been left largely to conjecture. This paper presents and tests a hypothesis about the determinants of risk premiums on corporate bonds. By risk premium is meant the difference between the market yield on a bond and the corresponding pure rate of interest. My hypothesis is as follows: (1) The average risk premium on a firm's bonds depends first on the risk that the firm will default on its bonds and second on their marketability. (2) The "risk of default" can be estimated by a function of three variables: the coefficient of variation of the firm's net income over the last

The Element of Lottery in British Government Bonds, 1694-1919

At a time when several governments are attempting to reduce the element of chance in their bond offerings, by selling non-marketable issues which are redeemable at the option of the holder or by bond support operations, it is interesting to consider in retrospect British attempts to save interest on the public debt by offering investors the chance to gamble. The British Treasury has extended two principal types of gamble to the investor: (1) the gamble on capital gain, and (2) the gamble on life-expectancy. The first was created by the sale of bonds at a heavy discount. The possibility of later redemption at par created the gamble of capital gain. Similarly this gamble was extended by combining a lottery with debt offerings. The gamble on lifeexpectancy was made possible by inviting subscriptions to life annuities. In appraising the effectiveness of these features in saving interest, two kinds of interest saving must be distinguished. ' Explicit ' saving in rate may be measured by a comparison of the market yield on a security which does not offer the element of chance and the yield, at issue price, of the security in which chance is involved. The amount of explicit interest saving is then this difference in rates multiplied by the amount raised by the gambling feature. In addition, the use of such a special-feature security to raise some part of the funds required would diminish the amount to be raised by ordinary issues and would tend therefore, if the demand for them were not perfectly elastic, to lower the rate that must be paid on them. The 'implicit' saving in rate is the difference between the rate paid on ordinary borrowing and the rate that would have had to be paid had the entire amount been raised by the issue of the ordinary security. The amount of implicit saving is this difference multiplied by the total amount borrowed.2