Frequency and Sequence: Convertible Debt Issuance Announcement Effect on Stock Returns

Abstract

Convertible debt that shares the characteristics of debt and equity is perceived to be riskier than straight debt, therefore the issuance announcement tends to lead to adverse market reaction. In this study we show that convertible debt issuance announcement is also associated with negative abnormal returns with evidence from the Malaysia capital market. We argue that the substantially smaller and illiquid convertible debt market do not affect the consistency of the findings. However, the main purpose of this study is to examine the effect of frequency and sequence of convertible debt issuance announcement on the issuers stock return. We find that both the frequency and sequence of issuance significantly affect the announcement returns. In the longer event window, we observe negative abnormal returns for the infrequent issuers. While frequent issuers report positive abnormal returns. Looking at the sequence of issuance, the first issues of convertible debt lead to negative market reaction, but as the information gap decreases, subsequent issues of convertible debt lead to insignificant abnormal returns. We argue that the findings of this study are mainly related to the theories of asymmetric information and sequential financing. In brief, this study contributes to the convertible debt literature by highlighting the need to incorporate the effect of frequency and sequence in examining the announcement effect of securities. Furthermore, this study adds that the additional features of convertible debt such as redeemable, non-redeemable, secured and unsecured do have significant impact on the announcement returns.