Journal article

Why are conversion-forcing call announcements associated with negative wealth effects?

Bruce D Grundy, Chris Veld, Patrick Verwijmeren, Yuriy Zabolotnyuk

Journal of Corporate Finance | ELSEVIER | Published : 2014


We analyze call announcement returns taking into account two recent developments in the convertible bond market: the inclusion of dividend protection clauses in convertibles' terms, and the high fraction of convertible issues purchased by hedge funds. Calls of dividend-protected convertible bonds are predictable, yet we still observe a negative stock price reaction that cannot be explained by signaling. Greater hedge fund involvement prior to a call means less short selling in response to the call and we document a reduced price reaction. We conclude that price pressure and not signaling underlies the negative announcement effect of convertible bond calls. © 2013.