Signaling with Convertible Debt

JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS, September 1995

Posted: 22 Oct 2000

See all articles by Wallace N. Davidson

Wallace N. Davidson

Southern Illinois University - Department of Finance

John L. Glascock

University of Connecticut - School of Business - Center for Real Estate and Urban Economic Studies; European Business School

Thomas V. Schwartz

affiliation not provided to SSRN

Abstract

We test whether the conversion price (ratio) is viewed by the stock market as a credible signal of the firm's future earnings prospects (Kim, 1990) and subsequently whether convertible debt serves as backdoor equity financing (Stein, 1992). Examining the conversion price in relation to current stock prices and a priori growth expectation produces an average expected time for convertible bonds tobe at-the-money of less than 1.5 years. Thus, as Stein suggests, convertibles appear to be a method of drawing equity into a firm's capital structure. We also find that the size of the firm's announcement period abnormal returns is positively related to the expected time for the convertible to become at-the-money. Given these relationships, we conclude that convertible debt issue announcements, on average, send an equity-like signal to the market.

JEL Classification: G00

Suggested Citation

Davidson, Wallace N. and Glascock, John L. and Schwartz, Thomas V., Signaling with Convertible Debt. JOURNAL OF FINANCIAL AND QUANTITATIVE ANALYSIS, September 1995, Available at SSRN: https://ssrn.com/abstract=6553

Wallace N. Davidson (Contact Author)

Southern Illinois University - Department of Finance ( email )

Mail Code 4626
Carbondale, IL 62901-4626
United States
618-453-1429 (Phone)
618-453-5626 (Fax)

John L. Glascock

University of Connecticut - School of Business - Center for Real Estate and Urban Economic Studies ( email )

Storrs, CT 06269
United States

European Business School ( email )

Gustav-Stresemann-Ring 3
Wiesbaden, Hessen 65189
Germany

Thomas V. Schwartz

affiliation not provided to SSRN

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