A Stock Market Reaction Following Convertible Bond Issuance : Evidence from Japan

This paper examines the stock price reaction to the announcement of convertible bonds (CBs) issuance during the period 1996 through 2002 in Japan. We discover a significantly negative stock price reaction to the announcement of CBs. This result conforms to the negative stock reaction in the U.S. market but is inconsistent with the previous study in Japan. Firm size is evidenced increasing the negative cross-sectional variation of abnormal stock return, while the growth options have positive relationship. There is no evidence of the association between the leverage and the abnormal return. In addition, the long-term performance of the stock prices after the CBs issuance firms are found under-performing the market index and what they should have done given their levels of systematic risks. Coupling with the negative stock price reaction around the issuance announcement period, the Japanese issuance firms under-react to the CBs issuance, consistent with the under-reaction hypothesis that has been explained by the U.S. empirical results