Journal Article10.1111/J.1540-6261.1985.TB02382.X
A Sequential Signalling Model of Convertible Debt Call Policy
Milton Harris,Arthur Raviv +1 more
TL;DR: In this paper, the authors attempt to resolve two puzzles concerning convertible debt calls by simultaneously rationalizing managers' observed call decisions and the market's reaction to them in a framework in which managers behave optimally given their private information, compensation schemes, and investors' reactions to their call decisions.
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Abstract: In this paper we attempt to resolve two puzzles concerning convertible debt calls. The first is that although it has been shown that conversion of these bonds should optimally be forced as soon as this is feasible, actual calls are significantly delayed relative to this prescription. The second is that common stock returns are significantly negative around the announcement of the call of a convertible debt issue. Our purpose is to simultaneously rationalize managers' observed call decisions and the market's reaction to them in a framework in which managers behave optimally given their private information, compensation schemes, and investors' reactions to their call decisions. Moreover, investors' reactions are rational in the sense of Bayes' rule given managers' call policy. In equilibrium, a decision to call is (correctly) perceived by the market as a signal of unfavorable private information. In addition to rationalizing observed call delays and negative stock returns at call announcement, several other testable implications are derived.
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Citations
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A Generalized Econometric Model and Tests of a Signalling Hypothesis with Two Discrete Signals
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Information Content of Insider Trading Around Corporate Announcements: The Case of Capital Expenditures
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Why Do Firms Hedge? An Asymmetric Information Model
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Convertible Bonds Are Not Called Late
TL;DR: The authors showed that most convertible bonds, given their call protection, are called as soon as possible and that there are significant cash flow advantages to delaying, and that the median call delay for all convertible bonds is less than four months.
121
References
The determination of financial structure: the incentive-signalling approach
TL;DR: In this paper, the authors show that if managers possess inside information about the activities of firms, then the choice of a managerial incentive schedule and of a financial structure signals information to the market, and in competitive equilibrium the inferences drawn from the signals will be validated.
Dividend Policy under Asymmetric Information
Merton H. Miller,Kevin Rock +1 more
TL;DR: In this article, the authors extend the standard finance model of the firm's dividend/investment/financing decisions by allowing the managers to know more than outside investors about the true state of the current earnings.
Imperfect Information, Dividend Policy, and "The Bird in the Hand" Fallacy
TL;DR: In this article, the authors assume that outside investors have imperfect information about firms' profitability and that cash dividends are taxed at a higher rate than capital gains, and they derive a comparative static result that relates the equilibrium level of dividend payout to the length of investors' planning horizons.
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Dividends, Dilution, and Taxes: A Signalling Equilibrium
Kose John,Joseph Williams +1 more
TL;DR: In this article, a signalling equilibrium with taxable dividends is identified, where corporate insiders with more valuable private information optimally distribute larger dividends and receive higher prices for their stock whenever the demand for cash by both their firm and its current stockholders exceeds its internal supply of cash.
1.6K
A contingent-claims valuation of convertible securities
TL;DR: In this paper, the Black-Scholes Option Model is used to price convertible securities as contingent claims on the firm as a whole, and the optimal policies for call and conversion of these securities are determined via the criterion of dominance.
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