Underpricing of New Convertible Debt Issues of U.S. Firms: 1980-2003 - Empirical Analysis

Journal of Financial Management and Analysis, Vol. 19, No.1, Spring 2006

Posted: 21 Sep 2006

See all articles by Camelia S. Rotaru

Camelia S. Rotaru

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance

Abstract

100-step trinomial tree is used to price a sample of 233 new convertible debt securities issued between 1980 and 2003. Results indicate that new convertible debt issues are offered at an average discount of 4.84 percent from fair value. It appears that issues with higher conversion premiums and those callable at any time prior to maturity are more underpriced. Longer maturity issues were more underpriced during the 1980s, but less underpriced during the post-1990 period. Furthermore, call-protected convertible securities issued after 1990 were less underpriced than the non-callable issues. Since the coupon rate is higher for callable securities, these findings may be due to investors accepting to pay more for the higher coupon rate.

Keywords: Convertible debt, New securities issuance, Debt pricing

JEL Classification: E44, G13, G32, O51

Suggested Citation

Rotaru, Camelia S., Underpricing of New Convertible Debt Issues of U.S. Firms: 1980-2003 - Empirical Analysis. Journal of Financial Management and Analysis, Vol. 19, No.1, Spring 2006, Available at SSRN: https://ssrn.com/abstract=931845

Camelia S. Rotaru (Contact Author)

University of Texas - Pan American - College of Business Administration - Department of Economics & Finance ( email )

1201 W. University Drive
Edinburg, TX 78539-2999
United States

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