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THE VALUATION EFFECTS OF OUT‐OF‐THE‐MONEY CALLS OF CONVERTIBLE SECURITIES
Author(s) -
Tang Alex P.,
Kadapakkam PalaniRajan,
Singer Ronald F.
Publication year - 1994
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.1994.tb00160.x
Subject(s) - convertible , moneyness , value premium , valuation (finance) , valuation effects , monetary economics , economics , business , market value , investment banking , financial economics , finance , capital asset pricing model , structural engineering , engineering
We examine the valuation effects of out‐of‐the‐money calls of convertible securities. In general, out‐of‐the‐money calls generate positive abnormal stock returns. These returns are higher when the call price exceeds the market value of the called securities (positive premium calls), compared with when the market value exceeds the call price (negative premium calls). Furthermore, Value Line Investment Survey net operating income forecasts are significantly higher after call announcements for positive premium calls, while the revision is insignificant for negative premium calls. The results are consistent with the hypothesis that positive premium calls signal positive information.