The Information Content of Calls of Convertible Preferreds: The Evidence from Earnings Forecasts

JOURNAL OF ACCOUNTING, AUDITING, AND FINANCE, Vol 11, No 4, Fall 1996

Posted: 20 Apr 1998

See all articles by Karen Shastri

Karen Shastri

Katz Graduate of Business

Kuldeep Shastri

University of Pittsburgh - Finance Group

Abstract

This paper examines the impact of the announcement of convertible preferred calls on earnings forecasts by financial analysts. Our results show that in-the-money calls are associated with no change in either forecasted earnings or forecasted long-term earnings growth. In addition, we find that the abnormal return around the announcement of the call is uncorrelated with changes in earnings or long-term growth rates. Similar results are obtained from the analysis of earnings changes around out-of-the-money calls. However, out-of-the-money calls are associated with marginally significant increases in forecasts of long-term growth, but these increases are not correlated with the announcement period abnormal returns. These results suggest that any information inherent in convertible preferred calls is not associated with future earnings. Therefore, they are more consistent with the Jensen free cash flow hypothesis than the Harris-Raviv signaling hypothesis.

JEL Classification: G32

Suggested Citation

Shastri, Karen Andrea and Shastri, Kuldeep, The Information Content of Calls of Convertible Preferreds: The Evidence from Earnings Forecasts. JOURNAL OF ACCOUNTING, AUDITING, AND FINANCE, Vol 11, No 4, Fall 1996, Available at SSRN: https://ssrn.com/abstract=2728

Karen Andrea Shastri (Contact Author)

Katz Graduate of Business ( email )

University of Pittsburgh
Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1533 (Phone)
412-648-1693 (Fax)

HOME PAGE: www.pitt.edu/~karen

Kuldeep Shastri

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)
412-648-1693 (Fax)

HOME PAGE: http://www.pitt.edu/~ks112354

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