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

Resumé

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.
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.
SprogEngelsk
TidsskriftJournal of Corporate Finance
Vol/bind24
Udgave nummer1
Sider135-148
Antal sider14
ISSN0929-1199
DOI
StatusUdgivet - feb. 2014

Emneord

  • Bond
  • Stock Market
  • Stocks

Citer dette

@article{f6660f4563f54e828d4042232a61a185,
title = "In-and Out-of-the-Money Convertible Bond Calls: Signaling or Price Pressure?",
abstract = "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.",
keywords = "Bond, Stock Market, Stocks",
author = "Bechmann, {Ken L.} and Asger Lunde and Zebedee, {Allan A.}",
year = "2014",
month = "2",
doi = "10.1016/j.jcorpfin.2013.11.002",
language = "English",
volume = "24",
pages = "135--148",
journal = "Journal of Corporate Finance",
issn = "0929-1199",
publisher = "Elsevier",
number = "1",

}

In-and Out-of-the-Money Convertible Bond Calls : Signaling or Price Pressure? / Bechmann, Ken L.; Lunde, Asger; Zebedee, Allan A.

I: Journal of Corporate Finance, Bind 24, Nr. 1, 02.2014, s. 135-148.

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

TY - JOUR

T1 - In-and Out-of-the-Money Convertible Bond Calls

T2 - Journal of Corporate Finance

AU - Bechmann,Ken L.

AU - Lunde,Asger

AU - Zebedee,Allan A.

PY - 2014/2

Y1 - 2014/2

N2 - 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.

AB - 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.

KW - Bond

KW - Stock Market

KW - Stocks

U2 - 10.1016/j.jcorpfin.2013.11.002

DO - 10.1016/j.jcorpfin.2013.11.002

M3 - Journal article

VL - 24

SP - 135

EP - 148

JO - Journal of Corporate Finance

JF - Journal of Corporate Finance

SN - 0929-1199

IS - 1

ER -