A study on the market reaction to hybrid securities announcements

Abstract

Abstract The thesis presents three studies that focus on the wealth effects of hybrid securities namely: convertible bonds and warrant-bonds. The wealth effects of these hybrid securities are investigated through both meta-analysis and event-studies. Chapter 2 incorporates a review of the literature on wealth effects associated with the announcement of convertible bonds and warrant-bond loans. The findings of 35 event studies, which include 84 sub-samples and 6,310 announcements, are analysed using meta-analysis. A mean cumulative abnormal return of 1.14% for convertible bonds compared with 0.02% for warrant-bonds are observed, the significant difference confirming a relative advantage for warrant-bonds. Abnormal returns for hybrid securities issued in the United States are significantly more negative than for those issued in other countries. In addition, issuing hybrid securities to refund debt does not seem to be favoured by investors. Finally, several factors identified as important by theory or in prior research are not significant within the cross-study models, suggesting that more evidence is needed to confirm whether they are robust. Chapter 3 presents a study that examines the market reaction to hybrid security announcements in an emerging country, specifically Malaysia, from January 1996 to December 2009. The results indicate that announcements of the intention to issue convertible bonds in Malaysia are associated with significantly negative abnormal returns of 1.10% (significant at the 10% level) on the event window of (-1, 1). On the other hand, announcements of the intention to issue warrant-bonds document significantly positive abnormal returns of 2.25% (significant at the 10% level) on the same event window. The ‘univariate’ test confirms that the wealth effects associated with the announcement of the intention to issue warrant-bonds is larger (i.e., more positive) than convertible bonds in line with few studies in different markets: Japan (Kang, Kim, Park, and Stulz, 1995), the Netherlands (De Roon and Veld, 1998), and German (Gebhardt, 2001). Non-significant abnormal returns of 0.81% and 0.23% on the event window ( 1, 1) are reported for announcements of hybrid securities by means of private placements and rights offerings, respectively, contradict with the ‘certification hypothesis’ of Hertzel and Smith (1993), and ‘signalling hypothesis’ of Heinkel and Schwartz (1986). This chapter also finds that there is no support for ‘information-signalling’ hypothesis (Ross, 1977), as non-significant abnormal returns are observed in the event window ( 1, 1) for announcements of hybrid securities for all purposes of offering (i.e., debt restructuring, mergers and acquisitions, capital expenditure, and working capital). These findings also highlight that listed firms in Malaysia with high risk uncertainty contribute to more negative abnormal returns in comparison to lower risk uncertainty firms, which contradicts with the ‘risk uncertainty hypothesis’. The final study presented in this thesis, Chapter 4, considers the wealth effects of hybrid security announcements in a developed country, the United Kingdom. This third study investigates the wealth effects of announcements of the intention to issue convertible bonds in the UK market over a period from January 1990 until July 2010. The study period also allows for an investigation on the market reaction to announcements of convertible bonds during the financial crisis that started in August 2007. Using the standard event study methodology, a negative abnormal return of 1.75% (significant at the 5% level) on the two-day event window is reported, confirming the findings of previous UK studies (Abyhankar and Dunning, 1999, and Wolf et al., 1999) which are also in line with studies performed using data from other countries such as US, Canada, Australia, and others. There are no significant differences between the results of the sub-samples before and during the financial crisis, suggesting that the economic conditions do not influence the market response. The results of the event study and the multivariate analysis in this chapter are consistent with the ‘market timing hypothesis’ implying that managers in the UK announce their intention to issue convertible bonds after a period of good stock price performance.