Stock Price Response to Calls of Convertible Bonds: Still a Puzzle

40 Pages Posted: 4 Jan 2005

See all articles by Ivan E. Brick

Ivan E. Brick

Rutgers Business School

Oded Palmon

Rutgers Business School

Dilip K. Patro

OCC

Date Written: October 5, 2004

Abstract

The literature has suggested liquidity price pressure as an explanation for the negative abnormal returns surrounding the announcements of conversion-forcing calls of convertible bonds and preferred stock, and of mergers via common stock exchange. We confirm the negative abnormal returns around the conversion-forcing call announcement, and under some specifications we also document a subsequent price recovery. The liquidity hypothesis implies that the price recovery should be inversely related to the initial price decline, and that the abnormal returns during the announcement event and the post announcement event should be related to proxies measuring the stock's liquidity. Our estimates are not consistent with these implications. Finally, we also do not find support for alternative explanations offered in the literature. Hence, we conclude that the reason for the negative abnormal returns around the announcement of a conversion-forcing call is still a puzzle.

Keywords: Convertible bonds, Conversion forcing call, Liquidity pressure, Asymmetric information

Suggested Citation

Brick, Ivan E. and Palmon, Oded and Patro, Dilip K., Stock Price Response to Calls of Convertible Bonds: Still a Puzzle (October 5, 2004). Available at SSRN: https://ssrn.com/abstract=485824 or http://dx.doi.org/10.2139/ssrn.485824

Ivan E. Brick (Contact Author)

Rutgers Business School ( email )

111 Washington Avenue
Newark, NJ 07102
United States
973-353-5155 (Phone)
973-353-1233 (Fax)

Oded Palmon

Rutgers Business School ( email )

Room 5123
100 Rockafeller Road
Piscataway, NJ 08854
United States
848-445-4209 (Phone)
848-445-3907 (Fax)

Dilip K. Patro

OCC ( email )

400 7th Street SW
Washington, DC 20219
United States
202-649-5548 (Phone)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
368
Abstract Views
2,498
rank
89,232
PlumX Metrics