Capital Structure as a Form of Signaling: The Use of Convertible Bonds

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Abstract/Contents

Abstract: In the face of asymmetrical information in financial markets, outside investors must rely on the firms’ actions in order to gain information known only to firm insiders. Such actions can be construed as signals of firm quality or internal projections of success, and capital structure can serve as one such signal. This study uses a sample of 100 convertible bonds issued from 1990 to 2007 to examine the market’s reactions to changes in the capital structures of the firms. A more debt-like issuance is theorized to result in positive abnormal returns, while a more equity-like issuance should result in negative abnormal returns. I also intend to investigate whether the use of capital structure as signaling differs with firms of different sizes, since information asymmetries would not be the same. This paper finds that the conversion premium of newly issued convertible bonds has a positive, statistically significant effect on the firms’ abnormal returns in the 30- and 200-day periods around the date of issuance. This effect is larger for smaller firms than for larger firms. However, the conversion premium has a much smaller, insignificant effect during the 10-day period, which may be caused by errors in determining the correct date that the market learned of the issuance

Type of resource	text
Date created	May 2009

Author	Yan, Rusi
Primary advisor	Shoven, John B.
Degree granting institution	Stanford University, Department of Economics

Subject	Stanford Department of Economics
Genre	Thesis

Location	https://purl.stanford.edu/jp868hb5241

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Preferred Citation: Yan, Rusi. (2009). Capital Structure as a Form of Signaling: The Use of Convertible Bonds . Stanford Digital Repository. Available at: https://purl.stanford.edu/jp868hb5241

Stanford University, Department of Economics, Honors Theses

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