Academic journal article International Journal of Business

A Stock Market Reaction Following Convertible Bond Issuance: Evidence from Japan

Academic journal article International Journal of Business

A Stock Market Reaction Following Convertible Bond Issuance: Evidence from Japan

Article excerpt


This paper examines the stock price reaction to the announcement of convertible bonds (CBs) issuance during the period 1996 through 2002 in Japan. We discover a significantly negative stock price reaction to the announcement of CBs. This result conforms to the negative stock reaction in the U.S. market but is inconsistent with the previous study in Japan. Firm size is evidenced increasing the negative cross-sectional variation of abnormal stock return, while the growth options have positive relationship. There is no evidence of the association between the leverage and the abnormal return. In addition, the long-term performance of the stock prices after the CBs issuance firms are found under-performing the market index and what they should have done given their levels of systematic risks. Coupling with the negative stock price reaction around the issuance announcement period, the Japanese issuance firms under-react to the CBs issuance, consistent with the under-reaction hypothesis that has been explained by the U.S. empirical results.

JEL: G10

Keywords: Convertible bond; Japan; Event study


Convertible bonds (CBs) are hybrid instruments with characteristics of both debt and equity. Like straight bonds, convertible bonds receive coupons and principal payments. At the same time, convertible bondholders have the option to convert their bonds into stocks at a conversion ratio. Most convertible bonds have features that the issuer can call the convertibles before maturity. Having the option of being exchanged into equity, a convertible bond has a coupon rate that is lower than that of the straight bond. The equity effects of the issuance of convertible bonds have important implications for financing policy. For the U.S. market, Smith (1986) concludes that stock price reaction is not significant to new debt issuance announcement, but it is significantly negative to new equity issuance announcement. Moreover, the price reaction is significantly negative to CBs issuance announcement with a smaller absolute value than that to the pure equity issuance. Under these different stock price reactions, U.S. corporate managers may make up their minds what type of offerings to choose to avoid harming existing stockholders.

In the U.S. market, it is shown by many researchers that the stock prices are significantly negative to the CBs issuance announcements. Dann and Mikkelson (1984), Eckbo (1986), and Mikkelson and Partch (1986) report negative abnormal returns during the announcement period for the CBs issuance firms. However, Kang and Stulz (1996) find a positive share price reaction to the announcement of the CBs issuance in Japan during period 1985 through 1991. They contribute the differences of the equity effect to the differences of the "organization of firms" between the Japanese and American firms. That means American managers' goal is to maximize the wealth of current shareholders while Japanese managers' goal is to invest in all positive NPV projects. The "bubble economy effects" hypothesis for the positive stock reaction has been rejected by Kang and Stulz (1996). The "bubble economy" in Japan means the phenomenon that the Japanese stock market had large positive returns during the second half of the 1980s and crashed at the beginning of 1990s. Kang and Stulz split the sample into announcements before 1990 and those in 1990 and 1991. They reject the "bubble economy effects" hypothesis by the result that the difference between the two sub-samples is not significant. However, the result is suspicious as the number of sub-sample in 1990 and 1991 accounts only 9% of the total sample. This forms the major interest of this paper: are there any differences of the abnormal stock returns to the announcement of the CBs issuance between the bull and post-bull market in Japan?

This paper examines the stock price reaction to the announcement of CBs issuance from 1996 to 2002 in Japan. …

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