Marie Dutordoir

Why Do Western European Firms Issue Convertibles Instead of Straight Debt or Equity

Unlike their US counterparts, European convertible debt issuers tend to be large companies with small debt- and equity-related financing costs. Therefore, it is a puzzle why these firms issue convertibles instead of standard financing instruments. This paper examines European convertible debt issuer motivations by estimating a security choice model incorporating convertibles, straight debt, and equity. We find that European convertibles are used as sweetened debt, not as delayed equity. This motivation is also reflected in the highly debt-like design of most European convertible issues. In addition, we show that economy-wide and country-specific factors have a significant incremental impact on the convertible debt choice.

Convertible Arbitrage Price Pressure and Short-Sale Constraints

Using a sample of 4,148 convertibles issued over 1990–2009 by companies listed in 35 countries, the authors exploited worldwide differences in short-sale constraints to examine whether short selling by convertible arbitrageurs creates downward pressure on convertible issuers’ stock prices. They found that short-sale constraints have a positive effect on issue-date abnormal stock returns, which suggests that a substantial part of the stock price effect of convertible issues is attributable to convertible arbitrageurs. Convertible bonds are securities that can be converted, at the option of the holder, into a fixed number of the issuer’s ordinary shares. Convertible arbitrage hedge funds have played an important role in the convertible bond market, especially since the beginning of the 21st century. These hedge funds combine long positions in convertibles with short positions in the underlying stock. We exploited worldwide differences in short-sale constraints to examine whether convertible arbitrage short selling creates downward pressure on convertible issuers’ stock prices. Because arbitrage hedge funds are unable to execute their hedging strategy in markets that are short-sale constrained, we used the existence of short-sale constraints as a proxy for the presence of convertible arbitrage hedge funds in a market. We hypothesized that convertibles issued by companies listed in countries where short selling is legally restricted are associated with more favorable issue-date stock price effects than are convertibles issued in countries where short selling is allowed and practiced. We tested this hypothesis with a sample of 4,148 convertible bonds issued over 1990–2009 by companies listed in 35 countries. In line with our hypothesis, we found that short-sale constraints have a positive effect on issue-date abnormal stock returns. We further found that this effect is stronger in years with higher hedge fund involvement and for offerings expected to induce more arbitrage short selling. In addition, our study maps the global convertible bond market as completely as permitted by publicly available data sources and offers new insights into the determinants of the negative stock price reaction associated with convertible bond offerings. Previous papers have attributed this negative reaction to the signaling content of convertible bond issues. Our approach allowed us to estimate the magnitude of downward price pressure around convertible bond offerings that is attributable to the actions of convertible arbitrageurs rather than to the negative signal inferred from the convertible bond announcement. Our findings suggest that both academics and practitioners who analyze post-2000 convertible bond announcement effects are likely to overstate the negative announcement effects when they fail to control for the short-sale pressure of convertible bond arbitrageurs. On a more general level, our study suggests that stock price behavior around corporate financing events can be substantially affected by short-selling regulations.

Self-Selection and Stock Returns Around Corporate Security Offering Announcements

Stock returns around security offering announcements are conditional on firms’ self-selection into a particular security type. We use a switching regression methodology on a data set of U.S. straight debt, convertible debt, and seasoned equity offerings to estimate counterfactual announcement returns that would be obtained had the same firms instead opted for alternative financing. Our evidence is consistent with firms choosing the financing type with the least negative expected announcement effect. Our results justify some observed pecking order behavior patterns better than do actual announcement effects, yet also suggest that for some firms equity-like financing may be preferred to debt-like financing.

The Impact of Brand Value Announcements on Firm Value

U.S. firms are not required to report the values of internally-developed brands on their balance sheets. This paper tests whether brand value estimates provided by an external organism, i.e., the consultancy firm Interbrand, are value relevant. Unlike prior value relevance studies we use an event study analysis, which enables us to assess (i) whether brand value announcements have a causal impact on stock prices, (ii) what is the magnitude of the impact, and (iii) whether there are cross-sectional differences in the brand value impact. We document that stockholder reactions to brand value announcements are both statistically and economically significant. Stock prices are linearly increasing in the magnitude of the brand value change relative to the previous years estimated value.

Corporate Social Responsibility and Seasoned Equity Offerings

We examine whether corporate social responsibility (CSR) creates value for seasoned equity issuers. Using a sample of SEOs made by U.S. companies between 2004 and 2013, we find that stock price reactions are less negative for SEO announcements by firms with better CSR performance. Our event study results are consistent with high CSR scores indicating lower agency costs of free cash flow. Inconsistent with this interpretation, however, further analysis shows that issuers with high CSR scores tend to increase their cash holdings and working capital after their SEOs, invest less in real assets, and have worse post-SEO operating performance than issuers with low CSR scores. Together, our findings indicate that high CSR scores mislead shareholders into attributing value-increasing motives to seasoned equity issues. Further analysis suggests that the market is not fooled repeatedly, however, as the positive impact of CSR scores on stock price reactions disappears when firms return to the capital market to make subsequent SEOs.

The Shareholder Wealth Effects of Modern Slavery Reporting Requirements

We examine the shareholder wealth effects of the adoption of the UK Modern Slavery Act (MSA) in 2015. The MSA’s Transparency in Supply Chains clause introduced new reporting requirements mandating certain firms to provide an annual statement outlining their actions to tackle modern slavery in their business and supply chains. An event study of stock price reactions of UK firms covered by the MSA to eight events associated with its adoption provides no evidence of abnormal stock returns. We do, however, uncover significant cross-sectional differences in stock price reactions, with results suggesting that the MSA provides a competitive advantage to firms with a demonstrated track record of addressing slavery risk. By contrast, we do not find evidence of an impact of firms’ pre-regulatory Corporate Social Responsibility disclosure on stock price reactions. Our findings highlight the economic value for companies of maintaining socially responsible sourcing practices, and inform the current policy debate on the importance of greater transparency in corporate supply chains.

A Run-Down of Merger Target Run-Ups

Correspondence MarieDutordoir, AllianceManchesterBusiness School,University ofManchester,ManchesterM139PL,UK. Email:marie.dutordoir@mbs.ac.uk Abstract We provide evidence of a drastic drop in stock run-ups of U.S. target firms preceding merger and acquisition (M&A) announcements over the past decades. The median target run-up declines from approximately 10% in the 1980s to 2% after 2010. The trend in target run-ups cannot be fully explained by deal or firm characteristics associated with deal anticipation. However, it disappears after controlling for changes in the strength of U.S. insider trading regulation over the research period. Further analyses corroborate our conclusion that more stringent insider trading regulation is the most likely explanation for the reduction in target run-ups.