Liquidity Risk, Firm Risk, and Issue Risk Premium Effects on the Abnormal Returns to New Issues of Convertible Bonds
55 Pages Posted: 18 Feb 2009
Date Written: February 15, 2009
This paper provides new evidence on the effects of the risk profiles of firms on the returns to convertible bond issues. Liquidity risk, firm risk, and issue risk premium factors are examined as determinants of abnormal returns around the convertible bond issue dates. The market responds favorably to the issuance of convertible bonds by issuers with mild levels of firm volatility risk. Liquidity risk (issue size) and issue risk premium factors (convertible Vega) have significantly negative effects on abnormal returns around the issue date. The findings are robust to different grouping criteria and estimation methods.
Keywords: convertible bond issuance effects, liquidity, firm risk, Vega
JEL Classification: G12, G14, G30, G32
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