The Performance of Firms that Issue Convertible Debt

Posted: 1 May 1998

See all articles by James K. Seward

James K. Seward

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

Craig M. Lewis

Vanderbilt University - Finance

Richard J. Rogalski

Dartmouth College - Tuck School of Business

Date Written: December 1997

Abstract

This paper examines post-issue operating performance, risk characteristics, and analyst forecasts to more fully understand issuer motivations for, and investor reactions to, the issuance of convertible debt. The main finding is that announcements of convertible debt offerings convey information about a firm's future operating performance and future risk changes. Issuer systematic risk declines, while unsystematic risk increases significantly in the post-offer period. Short-term and long-term measures of operating performance deteriorate. The former effect is caused by industry conditions, while the latter is issuer-specific. Finally, we find that analysts consistently overestimate issuer near-term earnings and long-term earnings growth rates. The results provide support for risk-shifting and adverse selection motives for the use of convertible debt.

JEL Classification: G32

Suggested Citation

Seward, James K. and Lewis, Craig M. and Rogalski, Richard J., The Performance of Firms that Issue Convertible Debt (December 1997). Available at SSRN: https://ssrn.com/abstract=79648

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)

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

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