Industry Conditions, Growth Opportunities, and Market Reactions to Convertible Debt Financing Decisions

38 Pages Posted: 13 Jan 1997

See all articles by Craig M. Lewis

Craig M. Lewis

Vanderbilt University - Finance

Richard J. Rogalski

Dartmouth College - Tuck School of Business

James K. Seward

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Date Written: November 1996

Abstract

This paper examines the relationship between convertible debt issue announcements, announcement period share price reactions, and the profitability of the issuing firm's growth opportunities. We find that investor reactions are positively related to the profitability of the issuing firm's investment opportunities. However, the relationship does not appear to be particularly robust across several model specifications. We then investigate the explanatory power of the issuer's relative performance within its own industry, and find that industry- adjusted growth opportunities appear to better explain investor reactions to convertible debt issues. Share price reactions are less negative (more positive) the higher the issuer's investment opportunities relative to that of the median industry performer. Thus, investors seem to react to convertible debt offerings more on the basis of relative performance with the issuer's industry, rather than absolute measures of issuer or industry performance.

JEL Classification: G14

Suggested Citation

Lewis, Craig M. and Rogalski, Richard J. and Seward, James K., Industry Conditions, Growth Opportunities, and Market Reactions to Convertible Debt Financing Decisions (November 1996). Available at SSRN: https://ssrn.com/abstract=1618 or http://dx.doi.org/10.2139/ssrn.1618

Craig M. Lewis

Vanderbilt University - Finance ( email )

401 21st Avenue South
Nashville, TN 37203
United States

Richard J. Rogalski

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

James K. Seward (Contact Author)

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States
608-263-2738 (Phone)
608-265-4195 (Fax)

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