The Performance of Long-Run Stock Returns Following Issues of Public and Private Debt
32 Pages Posted: 11 Aug 1998
Date Written: May 1998
Abstract
This study investigates the long-run stock returns following issues of corporate debt. The investigation of long-run returns allows us to use a balance sheet-based method of identifying debt issuers, which has two major advantages. First, the balance sheet method identifies both public and private debt issues. This feature is important because there have been no studies of the information content of private debt issues, while private debt is substantially more prevalent than public debt. Second, the balance sheet-based method yields a comprehensive sample that is approximately eight times larger than those from other studies that investigate long-run performance after debt issues. We find no abnormal mean or value-weighted returns in the five years following straight debt issues. However, we find that convertible debt issuers underperform the market on the order of 50 to 70 percent in the following five years. In pursuit of explanations, we find that convertible debt issues signal a deterioration of future profitability, which accounts for at least part of the stock price underperformance.
JEL Classification: G14, G32
Suggested Citation: Suggested Citation
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