Operating Performance and Stock Returns of Firms Calling Convertible Preferred Stocks

Abstract

Using methodologies developed by Barber and Lyon (1996 and 1997), we examine the long-run operating performance and stock returns of firms around in-the-money calls of convertible preferred stock. Our study intends to be a direct test of the hypothesis that managers call in-the-money convertibles when they view a decline in the firms' performance. We find no evidence that calling firms underperform non-calling benchmark firms. On the contrary, we find mild evidence that the post-call operating performance of calling firms is better than a carefully selected group of benchmark firms and call firms' post-call stock returns are no worse than benchmark firms.

Keywords: convertible security calls, convertible preferred stock, operating performance, stock returns, signaling