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Risk Changes around Calls of Convertible Bonds
Author(s) -
GarcíaFeijóo Luis,
Beyer Scott,
Johnson Robert R.
Publication year - 2010
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.2010.00260.x
Subject(s) - convertible bond , equity (law) , bond , convertible arbitrage , convertible , business , financial economics , monetary economics , economics , capital asset pricing model , finance , arbitrage pricing theory , structural engineering , political science , risk arbitrage , law , engineering
We examine changes in equity and asset betas around convertible bond calls and report two major findings. First, calling firms exhibit an increase in asset betas following the call. We argue that the finding is consistent with the implications of the sequential financing theory but not of the backdoor equity financing theory. Second, abnormal returns at call announcements are negative only for the subsample of firms that also exhibit an increase in equity beta. We conclude that risk changes help explain the market reaction to convertible bond calls.