We investigate the long-standing puzzle on the underpricings of convertible bonds. We hypothesize that the observed underpricing is induced by the possibility that a convertible bond might renegotiate on some of its covenants, e.g., an imbedded put option, in financial difficulties. Consistent...

We find that value stocks are riskier because they are usually firms under distress, have high financial leverages, and face substantial uncertainty in future earnings. These risk characteristics are as powerful as size and book-to-market in explaining cross sectional differences in returns in...