Access

You are not currently logged in.

Access your personal account or get JSTOR access through your library or other institution:

login

Log in to your personal account or through your institution.

If you need an accessible version of this item please contact JSTOR User Support

A Sequential Signalling Model of Convertible Debt Call Policy

Milton Harris and Artur Raviv
The Journal of Finance
Vol. 40, No. 5 (Dec., 1985), pp. 1263-1281
Published by: Wiley for the American Finance Association
DOI: 10.2307/2328112
Stable URL: http://www.jstor.org/stable/2328112
Page Count: 19
  • Read Online (Free)
  • Download ($33.95)
  • Cite this Item
If you need an accessible version of this item please contact JSTOR User Support
A Sequential Signalling Model of Convertible Debt Call Policy
Preview not available

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.

Page Thumbnails

  • Thumbnail: Page 
1263
    1263
  • Thumbnail: Page 
1264
    1264
  • Thumbnail: Page 
1265
    1265
  • Thumbnail: Page 
1266
    1266
  • Thumbnail: Page 
1267
    1267
  • Thumbnail: Page 
1268
    1268
  • Thumbnail: Page 
1269
    1269
  • Thumbnail: Page 
1270
    1270
  • Thumbnail: Page 
1271
    1271
  • Thumbnail: Page 
1272
    1272
  • Thumbnail: Page 
1273
    1273
  • Thumbnail: Page 
1274
    1274
  • Thumbnail: Page 
1275
    1275
  • Thumbnail: Page 
1276
    1276
  • Thumbnail: Page 
1277
    1277
  • Thumbnail: Page 
1278
    1278
  • Thumbnail: Page 
1279
    1279
  • Thumbnail: Page 
1280
    1280
  • Thumbnail: Page 
1281
    1281