بازخرید تبدیل سهام ممتاز و ثروت سهام
|کد مقاله||سال انتشار||مقاله انگلیسی||ترجمه فارسی||تعداد کلمات|
|23272||2014||8 صفحه PDF||سفارش دهید||7200 کلمه|
Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Business Research, Volume 67, Issue 4, April 2014, Pages 623–630
In this paper we provide the first comprehensive examination of the stock price reaction to announcements of convertible preferred stock repurchases over the 1981 to 2005 period. We document a positive and significant average common stock abnormal return of 3.27% around announcements of these repurchases. We test signaling and free cash flow explanations for the observed wealth effects by studying abnormal returns and changes in operating performance around repurchase announcements. We find that abnormal returns are positively related to size of repurchases and managerial ownership. We find no evidence of higher stock price reactions for low-q and high free cash flow firms. In addition, we find significant improvements in accounting profitability subsequent to repurchases, but not for low-q firms. Collectively, our results are most consistent with the signaling hypothesis.
An extensive literature in corporate finance has examined the wealth effects of repurchases of common stock and calls of convertible securities. Announcements of common stock repurchases are associated with positive stock price reactions (e.g., Asquith and Mullins, 1986, Dann, 1981, Peyer and Vermaelen, 2005 and Vermaelen, 1981). The most common explanation proposed for the observed wealth effects is that repurchases signal better prospects and higher future cash flows (Bhattacharya, 1979, Miller and Rock, 1985 and Vermaelen, 1984). On the other hand, calls of convertibles that force conversion into equity have been found to have negative wealth effects (see Hingorani et al., 1994, Mais et al., 1989 and Mikkelson, 1981). Stein (1992) argues that convertible securities can be used by firms as a way to raise common equity on a delayed basis and calls of these securities represent a completion of stock financing (see also Mayers, 1998). Hoffmeister, Hays, and Kelley (1987), Mann, Moore, and Ramanlal (1999), Kallberg, Liu, and Villupuram (2008), and Jung and Sullivan (2009) provide other potential motivations for convertible security issuance. Thus, similar to other stock issuance events, the most common interpretation of this negative wealth effect is that calls are signals of unfavorable information (e.g., Harris and Raviv, 1985, Ofer and Natarajan, 1987 and Singh et al., 1991). Many studies have examined the wealth impact of calls of convertible preferred stock, a method to extinguish outstanding convertible preferred securities. Calls of in-the-money convertibles incentivize convertible holders to convert into common equity since the call price is lower than the conversion value. Repurchases of convertibles can also be used to reduce outstanding convertible securities but this event has not yet been studied. Since the reduction of outstanding convertibles depends on the size of the repurchase, repurchasing firms can choose to retire a portion or all of an outstanding convertible issuance. Such repurchases require cash payouts and eliminate potential increases in common stock in the future, while conversion-forcing calls of convertibles require no payout and result in increases in common stock. The opposite nature of calls and repurchases of convertibles suggests that their motivations are likely to be different. Since calls have commonly been viewed by prior literature as signals of unfavorable information, repurchases may potentially be signals of better future prospects. In this paper, we provide the first comprehensive examination of convertible preferred stock repurchases and evaluate two alternative motivations that have been studied in similar corporate events. First, the signaling hypothesis views convertible preferred stock repurchases as a signal of better prospects and higher future cash flows. Since repurchases of convertible preferred stock eliminate the option to convert into common stock when stock prices are higher in the future, managers with more favorable private information are likely to repurchase. Next, the free cash flow hypothesis predicts that convertible preferred stock repurchases will alleviate the free cash flow problem since repurchases require cash payouts. Hence, both the signaling and free cash flow hypotheses predict a positive stock price reaction to announcements of convertible preferred stock repurchases. We analyze a sample of 92 convertible preferred stock repurchases, consisting of targeted repurchases, repurchase tender offers, and open-market repurchases, over the 1981 to 2005 period and find a positive and significant stock price reaction to announcements of these repurchases. The average two-day abnormal return is 3.27%. This finding sharply contrasts with negative wealth effects reported for calls of convertible preferred stock, but is similar to the evidence documented for repurchases of common stock. The positive wealth effect is consistent with both signaling and free cash flow hypotheses. We next conduct a series of tests to discern the primary explanation of the positive wealth effect. We conduct a cross-sectional analysis of announcement returns to test a signaling model similar to the one employed by Vermaelen (1981) and Peyer and Vermaelen (2005). We find abnormal returns are higher for larger repurchases and for firms with higher managerial ownership, consistent with the signaling hypothesis. In addition, if investors react favorably to convertible preferred stock repurchases because they consider them a signal of better future prospects, we would expect to find improvements in operating performance following repurchases. In line with this prediction, we find evidence of significant improvements in accounting profitability around repurchase announcements. The free cash flow hypothesis, on the other hand, predicts a higher stock price reaction around repurchase announcements for firms with poor investment opportunities and high free cash flow. It also predicts greater improvements in accounting profitability around repurchases for firms with poor investment opportunities. None of these predictions are supported in our empirical analysis. Following Grullon and Michaely (2004), we also examine whether repurchasing firms reduce their levels of capital expenditures and R&D, and cash holdings, around repurchases. Inconsistent with the free cash flow hypothesis, we find no evidence of significant reductions in any of these measures. Collectively, our results are most consistent with the signaling hypothesis. Our findings indicate that the motivations behind conversion-forcing calls of convertibles and repurchases are opposite: calls signal overvaluation of common stock while repurchases signal undervaluation. The rest of the paper is organized as follows. We develop our hypotheses in Section 2. Sample construction and descriptive statistics are reported in Section 3. Event study results and cross-sectional analyses of abnormal returns are presented in Section 4. An examination of operating performance is provided in Section 5. We conclude in Section 6.
نتیجه گیری انگلیسی
We provide the first study on the repurchases of convertible preferred stock which have characteristics opposite to calls of convertibles and similar to common stock repurchases. To examine the motivations of firms that repurchase convertible preferred stock, we analyze a sample of 92 convertible preferred stock repurchases over the 1981 to 2005 period. We find a positive and significant stock price reaction to their announcements with an average abnormal return of 3.27%. This result sharply contrasts with the negative wealth effects documented for the calls of convertibles. We test signaling and free cash flow hypotheses as potential explanations for the observed wealth effects. The positive announcement return for convertible preferred stock repurchases is consistent with the signaling hypothesis, in which these repurchases are viewed as a signal of better future prospects. It is also consistent with the free cash flow hypothesis because repurchases, through cash payouts to preferred stockholders, alleviate the free cash flow problem. We conduct cross-sectional analyses of announcement-period abnormal returns to further distinguish between the signaling and free cash flow hypotheses. We show that the abnormal returns are positively related to the size of repurchase and managerial ownership, supporting the signaling hypothesis. We find no support for the free cash flow hypothesis in that abnormal returns are not greater for low growth and high free cash flow firms. In addition, consistent with the signaling hypothesis, we find improvements in operating performance following repurchases of convertible preferred stock. However, we detect no evidence of performance improvements among low-q firms, which does not support the free cash flow hypothesis. Collectively, our results are most consistent with the signaling hypothesis.