We analyze call announcement returns taking into account two recent developments in the convertible bond market: the inclusion of dividend protection clauses in convertibles' terms, and the high fraction of convertible issues purchased by hedge funds. Calls of dividend-protected convertible bonds are predictable, yet we still observe a negative stock price reaction that cannot be explained by signaling. Greater hedge fund involvement prior to a call means less short selling in response to the call and we document a reduced price reaction. We conclude that price pressure and not signaling underlies the negative announcement effect of convertible bond calls.

Convertible call announcement effects, Dividend protection, Hedge funds, Price pressure, Signaling
dx.doi.org/10.1016/j.jcorpfin.2013.10.003, hdl.handle.net/1765/60888
ERIM Top-Core Articles
Journal of Corporate Finance
Erasmus Research Institute of Management

Grundy, B.D, Veld, C, Verwijmeren, P, & Zabolotnyuk, Y. (2014). Why are conversion-forcing call announcements associated with negative wealth effectsα. Journal of Corporate Finance, 24, 149–157. doi:10.1016/j.jcorpfin.2013.10.003