New evidence on the pecking order hypothesis: the case of French convertible bonds
نویسنده
چکیده
Convertible bonds (CBs) are an important asset class but their analysis in function of the equity and bond components has received insufficient attention in France. This study investigates the relation between announcement effects and equity components for 141 French CB issues. We use the CB sensitivity to its underlying common stock as a proxy for the equity component. Our results indicate that CB issue announcements imply significantly negative market responses, which are negatively related to the equity component. This result supports the Myers and Majluf (1984) model [Myers, S.C., Majluf, N.S., 1984. Corporate financing and investment decisions when firms have information that investors do not have. J. Financial Econ. 13, 187–221]. A more detailed analysis reveals that the market reaction is significantly positive for the subset of ‘mixed’ CBs. Mixed CB issuers are characterized by high informational asymmetries about investment opportunities compared with informational asymmetries about assets-in-place. This finding supports the revised Myers and Majluf model, which predicts positive announcement effects under certain conditions. © 2000 Elsevier Science B.V. All rights reserved. JEL classification: G32; G14
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