بررسی اثرات سیگنالینگ در ارتباط با طراحی اوراق قرضه قابل تبدیل

In this paper we investigate whether the terms used in the design of a convertible debt issue act as a signal of the issuing firm's future growth prospects. Our general premise is that convertible debt design terms are interrelated and arranged in a manner that signals asymmetric information to market participants. Empirical tests support our hypothesis, even after controlling for risk, firm size, time-to-maturity, and industry effects. Firms issuing convertible debt that arrange terms to take advantage of relatively better future growth prospects are found to have a relatively lower negative price reaction around the announcement of the offer.

In this paper we utilize the terms used in the design of a convertible debt issue to derive a proxy of that firm's future growth prospects. It is our contention that this growth proxy provides a better estimate of any change in the market's perception of growth by addressing the limitation of prior studies. Specifically, we consider the informational content of the terms of a convertible debt issue that existing studies ignore. In contrast, many previous studies of convertible debt issues use historic data to develop proxies of future growth, such as, the year-to-year change in income or assets and the market-to-book value (Pilotte, 1992 and Lewis et al., 2003). We believe our technique is more consistent with how market participants interpret the informational content in issue announcements. The proxy of future growth prospects we derive provides the following insights. First, we find that our measure of future growth is often much lower than growth estimated by pre-event period returns. This supports findings of prior studies that companies issue convertible debt after periods of excessively high growth (Mikkelson and Partch, 1986, Spiess and Affleck-Graves, 1999, Lewis et al., 1999 and Marciukaityte and Varma, 2007). Consistent with this belief, we find that the change in growth prospects implied by the issue's terms does signal important information to investors. These results are robust after controlling for firm risk, time-to-maturity, firm leverage, and industry effects. In general, our results confirm a relationship between announcement period returns and growth (Jen et al., 1997, Lewis et al., 1999 and Lewis et al., 2003). Our findings also substantiate the supposition of Brennan and Schwartz (1981) by showing that the use of convertible debt to raise funds is especially useful for high risk, high growth firms. We also argue that the growth proxy developed in this paper may provide greater insight than those growth proxies derived from historic, firm-specific accounting and financial data, such as, the year-to-year change in income or assets and the market-to-book value (Pilotte, 1992, Jung et al., 1996, Munro, 1996 and Lewis et al., 2003). The inherent assumption made when using historic data is either that past trends in growth accurately reflect future trends (the use of ex-post measures, such as, growth in income or assets) or that the market has correctly interpreted a firm's future growth prospects (the use of ex-ante measures, such as, market-to-book value). It is important to note that in either case these historic proxies are based on data known prior to the announcement of the convertible debt issue, whereas our model incorporates information included in the issuance announcement. In conclusion, we believe the measure of growth developed in this paper demonstrate that investors react differentially to an announced issue of convertible debt. As such, we suggest an alternative to Denis (1994) who concludes that the relationship between announcement effects and growth is weaker than expected because any effect is significant only when growth opportunities are extremely high. Instead, our model points to the importance of measuring growth opportunities through features of the security design. Our findings support our contention that managers arrange the terms of convertible debt issue to take advantage of their asymmetric information of future growth prospects while considering the trade-off between risk and growth.

In this paper we utilize the terms used in the design of a convertible debt issue to derive a proxy of that firm's future growth prospects. It is our contention that this growth proxy provides a better estimate of any change in the market's perception of growth by addressing the limitation of prior studies. Specifically, we consider the informational content of the terms of a convertible debt issue that existing studies ignore. In contrast, many previous studies of convertible debt issues use historic data to develop proxies of future growth, such as, the year-to-year change in income or assets and the market-to-book value (Pilotte, 1992 and Lewis et al., 2003). We believe our technique is more consistent with how market participants interpret the informational content in issue announcements. The proxy of future growth prospects we derive provides the following insights. First, we find that our measure of future growth is often much lower than growth estimated by pre-event period returns. This supports findings of prior studies that companies issue convertible debt after periods of excessively high growth (Mikkelson and Partch, 1986, Spiess and Affleck-Graves, 1999, Lewis et al., 1999 and Marciukaityte and Varma, 2007). Consistent with this belief, we find that the change in growth prospects implied by the issue's terms does signal important information to investors. These results are robust after controlling for firm risk, time-to-maturity, firm leverage, and industry effects. In general, our results confirm a relationship between announcement period returns and growth (Jen et al., 1997, Lewis et al., 1999 and Lewis et al., 2003). Our findings also substantiate the supposition of Brennan and Schwartz (1981) by showing that the use of convertible debt to raise funds is especially useful for high risk, high growth firms. We also argue that the growth proxy developed in this paper may provide greater insight than those growth proxies derived from historic, firm-specific accounting and financial data, such as, the year-to-year change in income or assets and the market-to-book value (Pilotte, 1992, Jung et al., 1996, Munro, 1996 and Lewis et al., 2003). The inherent assumption made when using historic data is either that past trends in growth accurately reflect future trends (the use of ex-post measures, such as, growth in income or assets) or that the market has correctly interpreted a firm's future growth prospects (the use of ex-ante measures, such as, market-to-book value). It is important to note that in either case these historic proxies are based on data known prior to the announcement of the convertible debt issue, whereas our model incorporates information included in the issuance announcement. In conclusion, we believe the measure of growth developed in this paper demonstrate that investors react differentially to an announced issue of convertible debt. As such, we suggest an alternative to Denis (1994) who concludes that the relationship between announcement effects and growth is weaker than expected because any effect is significant only when growth opportunities are extremely high. Instead, our model points to the importance of measuring growth opportunities through features of the security design. Our findings support our contention that managers arrange the terms of convertible debt issue to take advantage of their asymmetric information of future growth prospects while considering the trade-off between risk and growth.