ANNOUNCEMENT EFFECTS OF CONVERTIBLE SECURITIES

Abstract

The issue of convertible debt in Singapore is becoming more popular. Convertible securities are hybrid securities that have advantages of both leverage and convertibility. Because the amount of research into the announcement impact of convertible securities in Singapore has been limited and difficult, this study seeks to analyze and explain the phenomenon on announcement day. Generally, the market did not response favourably to announcements of convertible securities. On day 0, there was a - 1.5% drop in the residual. This was followed by another -0.9% drop on day 1. Both falls were significant at the 5% level. Thereafter the stocks drifted downward. Thus, the evidence shows that the Stock Exchange of Singapore is not efficient with respect to the announcement of convertible debt issue. It has also been found that the two-day residual can explain the announcement effects of the convertible debt issue. The decision to issue convertibles is contingent on the stock performance prior to the event period. This it may be true that managers perceive their stock value to be overpriced and issue convertible securities to take advantage of such mispricings. I find this to be true in Singapore. Eighty percent of my sample stocks rose, on average, 41% for the six months period preceding the event period. The regression also confirmed that the magnitude of the two-day average abnormal return can be somewhat explained by the prior period stock performance. Such relationship is found to be negative. Debt size is the other variable that can determine the announcement effect. Bigger debt issue seems to generate greater negative residual returns. A two-variable model is thus proposed to capture the announcement day abnormalities. Its interpretation is as follows: for every SSIOO million of convertible debt raised, the mean excess return will fall by 1.98%. In addition, a 12% increase in stock value of the firm for the two month period prior to the event period, a further drop of 1.3% in the mean excess return is expected. The equity component inherent in the convertibles, the stated purpose of the debt issue, the size and the profitability of the firm cannot explain the abnormal returns in the event period. The two types of convertible securities included in the study has also no relationship with the abnormality observed on the announcement day.