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
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: Suggested Citation