James K. Seward

Is Convertible Debt a Substitute for Straight Debt or for Common Equity

Firms have two motivations for issuing convertible debt. Some issue convertible debt instead of straight debt to mitigate the costs of bondholder/stockholder agency conflicts. Others issue convertible debt instead of common debt to reduce the costs of adverse selection.

THE GOVERNANCE AND CONTROL OF VOLUNTARY CORPORATE SPIN-OFFS

We investigate the role that a voluntary corporate restructuring can play in the design of efficient internal corporate control mechanisms. To this end, we examine the post-restructuring internal control practices in 78 voluntary corporate spin-offs that were completed between 1972 and 1987. We find that the selection of the new CEOs, the design of their compensation contracts, and the staffing of the boards of directors and their compensation committees in the spun-off firms can be seen as ex ante efficient. These governance and control practices, however, are not strongly related to the observed positive market reactions to the spin-off announcements. The results indicate that equity reorganizations facilitate the implementation of efficient internal governance and control practices, but that other factors must influence the share price reactions to the announcement of such voluntary corporate restructurings.

What Is Special about the Roles of Underwriter Reputation and Market Activities in Initial Public Offerings

This article examines the interaction between underwriter reputation and market activities during the initial public offering (IPO) process. Underwriter reputation is a significant determinant of premarket underwriter activities, weakly related to aftermarket price stabilization activities, and unrelated to issuer returns. Premarket underwriter activities are a significant determinant of issue-date returns and aftermarket underwriter activities but are unrelated to longer-run returns. Aftermarket underwriter activities are significantly related to longer-run returns. The results suggest that simultaneous consideration of underwriter reputation and market activities is important if proper inferences about the IPO process and investor returns are to be drawn. Copyright 2002 by the University of Chicago.

The long-run performance of firms that issue convertible debt: an empirical analysis of operating characteristics and analyst forecasts

Many firms issue hybrid securities, such as convertible debt, instead of standard securities like straight debt or common equity. Theoretical arguments suggest that convertible debt minimizes costs for firms facing high debt- and equity-related external financing costs. Theory also suggests that an appropriately designed convertible security provides efficient investment incentives. We show, however, that firms on average perform poorly following the issuance of convertible debt. The empirical evidence suggests that the efficient investment decisions predicted by theory are not in fact achieved by the actual design and issuance of convertible debt securities. An alternative interpretation of convertible debt offers is that investors ration the participation of some issuers in the seasoned equity market. q 2001 Elsevier Science B.V. All rights reserved.

Rearranging Residual Claims: A Case for Targeted Stock

This paper describes and analyzes a relatively new method of equity-based restructuring, Targeted Stock. We examine announcement period share price reactions for completed, pending, and canceled offerings. Although the total number of completed transactions to date is small, we document a positive share price reaction on average for this form of equity reorganization. We then compare and contrast Targeted Stock with alternative equity reorganization forms, including spin-offs, equity carve-outs, and dual class common stock. We argue that Targeted Stock is most useful for firms in which the benefits of integration and control over corporate operating and financing activities outweigh the benefits of a complete or partial separation of the targeted business unit(s).

Risk changes around convertible debt offerings

Abstract Firms issuing convertible debt experience poor long-run stock price and operating performance. We examine the possibility that this poor performance may be caused by an unexpected increase in the cost of capital. Our finding that the cost of capital decreases following a convertible debt offer (CDO) is inconsistent with this interpretation. We also provide evidence that idiosyncratic and total risk increases and that these increases are not related to corresponding changes in the issuers industry. The results are consistent with an interpretation that idiosyncratic risk affects investment decisions following convertible debt offers, which in turn adversely impacts future operating performance. Our empirical evidence reinforces the notion suggested in earlier studies that the efficient investment decisions predicted by theory are not achieved by the actual design and issuance of convertible debt securities in practice.

Corporate issues of foreign currency exchange warrants: A case study of financial innovation and risk management

Abstract We argue that hedging and risk management activities of modern corporations arise as a direct consequence of attempts to create shareholder wealth through financial innovation. We formalize this argument by examining in detail corporate issues of foreign currency exchange warrants. We then focus on one multiple issuer to demonstrate how the foreign exchange risk created by the sale of the warrants can be eliminated. The use of off-balance-sheet risk management techniques to lock in the benefits of selling overpriced securities raises questions about the information content of innovative corporate financing decisions.

Chapter 28 Financial distress, bankruptcy and reorganization

Publisher Summary This chapter discusses the recent developments in the topics of financial distress, bankruptcy and reorganization. It focuses primarily on developments in the corporate finance literature, although it also describes some important contributions by legal scholars that bear on the issue. The chapter presents the legal and economic ramifications of the U.S. Bankruptcy Code, focusing on the Bankruptcy Reform Act of 1978 as it is considered important to have a deep appreciation of the main provisions of the U.S. Bankruptcy Code in studying the economic implications of financial distress and formal bankruptcy procedures. To present the theoretical examination of the relationship between financial distress and economic distress, the chapter presents the Modigliani–Miller theorem. An important component of this chapter is a synthesis of the theoretical and empirical evidence on private and formal resolutions of financial distress. At the outset, it is recognized that the alternative methods for resolving financial distress are related in the sense that the incentives that various claimant groups have to reorganize a financially distressed firm depend on the relative costs and benefits conferred by each method. The various private methods of resolving financial distress are described through debt restructurings, workouts, and informal reorganizations in the capital and real-asset markets.

The Information Content of Value Line Convertible Bond Rankings

The authors extend the research on the Value Line enigma to evaluate whether Value Line recommendations for convertible bonds provide excess returns, like Value Line’s recommendations do for common stocks and options. They find that, although convertible bond recommendations provide excess returns, the convertible bond rankings do not provide useful information beyond that contained in common stock recommendations of the same convertible bonds.

Do Bond Investors Win or Lose

his article explains why the basic event study methodology of effects of corporate T restructuring on equity returns may be inappropriate for examining the effect on bondholder wealth. It questions the validity of extant empirical results and the value of inferences based upon bond event study findings and suggests how studies aimed at measuring wealth transfers among financial claimants might proceed. Perhaps most important, it notes that the work done so far has not yet produced rules that would be helpful in making investment decisions.