Convertible Securities in Merger Transactions

52 Pages Posted: 20 Mar 2006 Last revised: 16 Mar 2010

See all articles by John D. Finnerty

John D. Finnerty

Finnerty Economic Consulting LLC; Fordham University - Finance Area

An Yan

Fordham University - Gabelli School of Business

Date Written: March 1, 2009

Abstract

This paper provides a rationale for the use of convertible securities as the medium of exchange in corporate change-of-control transactions. We argue that convertible securities can resolve the information asymmetry about the bidder's value while at the same time mitigating the information asymmetry about the target's value. In contrast, deals with cash or stock can only address one information asymmetry or the other but not both. Empirically, we find that a bidder is more likely to offer convertible securities, rather than all cash or all stock, when both the bidder and its target face large asymmetric information problems. We also find that both bidders and targets in convertible deals enjoy positive abnormal stock returns around takeover announcements. These findings provide empirical support for the use of convertible securities to resolve the double-sided asymmetric information problem. Finally, we find that bidder returns in convertible deals are larger than in all-cash and all-stock deals, but that target returns in convertible deals are smaller than in all-cash and all-stock deals.

Keywords: convertible securities, mergers, asymmetric information

JEL Classification: G32, G34

Suggested Citation

Finnerty, John D. and Yan, An, Convertible Securities in Merger Transactions (March 1, 2009). EFA 2006 Zurich Meetings. Available at SSRN: https://ssrn.com/abstract=891576 or http://dx.doi.org/10.2139/ssrn.891576

John D. Finnerty (Contact Author)

Finnerty Economic Consulting LLC ( email )

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HOME PAGE: http://www.finnecon.com

Fordham University - Finance Area ( email )

113 West 60th Street
New York, NY 10023
United States
2125991640 (Phone)
2125991242 (Fax)

HOME PAGE: http://www.finnecon.com

An Yan

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States
212-636-7401 (Phone)
212-765-5573 (Fax)

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