Death Spiral Convertibles

104 Pages Posted: 24 Jun 2001

See all articles by Pierre Hillion

Pierre Hillion

INSEAD - Finance

Theo Vermaelen

INSEAD - Finance; European Corporate Governance Institute (ECGI)

Date Written: May 2001


Death spiral convertibles are privately held convertible securities (preferred stock or debentures) with a conversion price that is set at a discount from the average (or sometimes the minimum) of past stock prices in a look-back period. Although, in theory, these securities have the potential to reduce agency costs of debt and problems related to adverse selection, they have been called "death spirals" because of their potential to create dilution and stock price declines. On the basis of all 487 issues announced before August 1998, we find that this bad reputation is indeed justified: an investor who buys the common stock of the issuer loses, on average, 34% of his wealth one year after the issue date. Although our sample period coincides with one of the strongest bull markets in U.S. history, in 85% of the cases one-year post-announcement returns are negative. However, we also find that issuers also experience a significant decline in operating profitability relative to benchmark firms.

Keywords: Convertibles, financial innovation, anomalies, capital structure

JEL Classification: G32

Suggested Citation

Hillion, Pierre and Vermaelen, Theo, Death Spiral Convertibles (May 2001). Available at SSRN: or

Pierre Hillion

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
65 799 5388 (Phone)
65 799 5399 (Fax)

Theo Vermaelen (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
33 1 60 72 42 63 (Phone)
33 1 60 72 40 45 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
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1000 Brussels

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