The Optimal Call Policy for Convertible Bonds: Is There a Market Memory Effect

Abstract:     
This paper examines the market memory effect in convertible bond markets. More specifically, we look at the pricing of convertible bonds issued after the original issuer redeemed previous issues without giving an opportunity for investors to benefit from bond value appreciation. We find evidence that the market underprices new convertible bond issues of firms that call their bonds early. We also find that the equity-like bonds of early calling firms are more underpriced than debt-like bonds of the same firms.

Keywords: convertible bonds, optimal call policy, market memory

JEL Classifications: G12, G30

Working Paper Series