Risk changes around convertible debt offerings

Craig M. Lewis, Richard J. Rogalski, James Seward

Research output: Contribution to journalArticle

19 Citations (Scopus)

Abstract

Firms issuing convertible debt experience poor long-run stock price and operating performance. We examine the possibility that this poor performance may be caused by an unexpected increase in the cost of capital. Our finding that the cost of capital decreases following a convertible debt offer (CDO) is inconsistent with this interpretation. We also provide evidence that idiosyncratic and total risk increases and that these increases are not related to corresponding changes in the issuer's industry. The results are consistent with an interpretation that idiosyncratic risk affects investment decisions following convertible debt offers, which in turn adversely impacts future operating performance. Our empirical evidence reinforces the notion suggested in earlier studies that the efficient investment decisions predicted by theory are not achieved by the actual design and issuance of convertible debt securities in practice.

Original languageEnglish (US)
Pages (from-to)67-80
Number of pages14
JournalJournal of Corporate Finance
Volume8
Issue number1
DOIs
StatePublished - 2002

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Convertible debt
Investment decision
Idiosyncratic risk
Operating performance
Cost of capital
Stock price performance
Empirical evidence
Total risk
Industry

Keywords

  • Convertible debt offerings
  • Cost of capital
  • Risk changes

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Cite this

Risk changes around convertible debt offerings. / Lewis, Craig M.; Rogalski, Richard J.; Seward, James.

In: Journal of Corporate Finance, Vol. 8, No. 1, 2002, p. 67-80.

Research output: Contribution to journalArticle

Lewis, Craig M. ; Rogalski, Richard J. ; Seward, James. / Risk changes around convertible debt offerings. In: Journal of Corporate Finance. 2002 ; Vol. 8, No. 1. pp. 67-80.
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