Short Sales, Price Pressure, and the Stock Price Response to Convertible Bond Calls

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Resumé

The announcement of a convertible bond call is associated with an average contemporaneous abnormal stock price decline of 1.75% and an ensuing price recovery in the conversion period. A price fall and the subsequent recovery suggest price pressure as the explanation for the announcement effect. However, in general the option to convert is not exercised early and hence, the increase in the number of shares outstanding does not occur at the announcement date. Instead, this paper argues and provides evidence that hedging-induced short selling causes at least part of the short-run price pressure.
The announcement of a convertible bond call is associated with an average contemporaneous abnormal stock price decline of 1.75% and an ensuing price recovery in the conversion period. A price fall and the subsequent recovery suggest price pressure as the explanation for the announcement effect. However, in general the option to convert is not exercised early and hence, the increase in the number of shares outstanding does not occur at the announcement date. Instead, this paper argues and provides evidence that hedging-induced short selling causes at least part of the short-run price pressure.
SprogEngelsk
TidsskriftJournal of Financial Markets
Vol/bind7
Udgave nummer4
Sider427-451
ISSN1386-4181
DOI
StatusUdgivet - 2004

Emneord

  • Convertible bond calls
  • Hedging
  • Short selling
  • Price pressure
  • Underwriting

Citer dette

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Short Sales, Price Pressure, and the Stock Price Response to Convertible Bond Calls. / Bechmann, Ken L.

I: Journal of Financial Markets, Bind 7, Nr. 4, 2004, s. 427-451.

Publikation: Bidrag til tidsskriftTidsskriftartikelForskningpeer review

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