In-and Out-of-the-Money Convertible Bond Calls: Signaling or Price Pressure?

Ken L. Bechmann, Asger Lunde, Allan A. Zebedee

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

Abstrakt

Convertible bond calls typically cause significant reactions in equity prices. The empirical research largely finds negative and positive announcement effects for the in-the-money and the out-of-the-money calls respectively. However, this research has difficulty distinguishing between the two main theoretical explanations: the signaling effect and the price pressure effect. In this paper, we differentiate between these two effects by using a unique data set of the in- and the out-of-the-money calls in the United States during the period of 1993 to 2007. We find that the announcement effect for the in-the-money call is predominantly explained by the subsequent order imbalances; and the stock market's reaction is spread over an entire trading day, which is consistent with the price pressure effect. In contrast, the announcement effect for the out-of-the-money call is driven by the size of the called convertible bond; and the stock market's reaction is almost immediate, which is consistent with the signaling effect.
OriginalsprogEngelsk
TidsskriftJournal of Corporate Finance
Vol/bind24
Udgave nummer1
Sider (fra-til)135-148
Antal sider14
ISSN0929-1199
DOI
StatusUdgivet - feb. 2014

Emneord

  • Bond
  • Stock Market
  • Stocks

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