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THE PRICING AND PERFORMANCE OF CONVERTIBLE PREFERRED STOCK OFFERINGS FOLLOWING ISSUANCE

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Date Issued:
2004
Abstract/Description:
This dissertation is a comprehensive study of convertible-preferred-stock pricing and performance following issuance. It is the first major academic study that identifies significant abnormal performance of corporate contingent claims following issuance.The research utilizes both option-based contingent claims valuation models and econometric techniques to investigate the sources of superior investment performance of convertible securities as an asset class that has persisted for the past thirty years.Two main issues are examined: potential underpricing of convertible preferred stocks at issuance and their subsequent investment performance.Underpricing is examined based on a robust contingent-claims valuation model. Using two samples of convertible preferred stock offerings (24 issues, 12,051 observations and 69 issues, 28,831 observations respectively), the study provides evidence of statistically and economically significant underpricing at issuance that ranges from 2.9% to 1.4% and persists from the first day of convertible trading up to six months following issuance.Underpricing is invariant to convertible ratings and the exchange where the issues are traded. It is found, however, that, large and mid cap issues are more likely to be underpriced than small cap convertibles. Also, the offerings that are underwritten by non-reputable investment bankers are more likely to be underpriced than those underwritten by reputable investment bankers.Abnormal performance based on econometric techniques affirms underpricing at issuance. Statistically significant holding-period excess returns of convertibles over their underlying common stock returns range from 0.81% for the first week to 2.04% for the first five months following issuance. Excess returns are invariant to security ratings, exchange listing, firm size, underwriter reputation and the size of the issue. Further, panel data analysis of daily returns suggests excess returns of 1.1 percent (1.8 percent) for the first week (month) following issuance. Excess returns can be explained by increased sensitivity of convertible returns to the returns of their underlying common stocks in the first six months following issuance. Cross-sectional variations of this increased sensitivity indicates investment-grade issues, listed on NYSE/AMEX, by large firms, using reputable underwriters and for large issues are more sensitive to the underlying common stock in the first six month following issuance than securities with opposing characteristics. Underpricing at issuance is also indicated by investment models favored by convertible trading desks: about one dollar on an average price of thirty five during the first week following issuance with underpricing persisting up to 6 months following issuance. The excess returns cannot be attributed to liquidity, high betas of underlying stock or excess volatility of convertibles following issuance. Conversely, volatility analysis indicates risk-adjusted excess returns are likely to be higher than reported.
Title: THE PRICING AND PERFORMANCE OF CONVERTIBLE PREFERRED STOCK OFFERINGS FOLLOWING ISSUANCE.
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Name(s): Guzhva, Vitaly S., Author
Ramanlal, Pradipkumar, Committee Chair
University of Central Florida, Degree Grantor
Type of Resource: text
Date Issued: 2004
Publisher: University of Central Florida
Language(s): English
Abstract/Description: This dissertation is a comprehensive study of convertible-preferred-stock pricing and performance following issuance. It is the first major academic study that identifies significant abnormal performance of corporate contingent claims following issuance.The research utilizes both option-based contingent claims valuation models and econometric techniques to investigate the sources of superior investment performance of convertible securities as an asset class that has persisted for the past thirty years.Two main issues are examined: potential underpricing of convertible preferred stocks at issuance and their subsequent investment performance.Underpricing is examined based on a robust contingent-claims valuation model. Using two samples of convertible preferred stock offerings (24 issues, 12,051 observations and 69 issues, 28,831 observations respectively), the study provides evidence of statistically and economically significant underpricing at issuance that ranges from 2.9% to 1.4% and persists from the first day of convertible trading up to six months following issuance.Underpricing is invariant to convertible ratings and the exchange where the issues are traded. It is found, however, that, large and mid cap issues are more likely to be underpriced than small cap convertibles. Also, the offerings that are underwritten by non-reputable investment bankers are more likely to be underpriced than those underwritten by reputable investment bankers.Abnormal performance based on econometric techniques affirms underpricing at issuance. Statistically significant holding-period excess returns of convertibles over their underlying common stock returns range from 0.81% for the first week to 2.04% for the first five months following issuance. Excess returns are invariant to security ratings, exchange listing, firm size, underwriter reputation and the size of the issue. Further, panel data analysis of daily returns suggests excess returns of 1.1 percent (1.8 percent) for the first week (month) following issuance. Excess returns can be explained by increased sensitivity of convertible returns to the returns of their underlying common stocks in the first six months following issuance. Cross-sectional variations of this increased sensitivity indicates investment-grade issues, listed on NYSE/AMEX, by large firms, using reputable underwriters and for large issues are more sensitive to the underlying common stock in the first six month following issuance than securities with opposing characteristics. Underpricing at issuance is also indicated by investment models favored by convertible trading desks: about one dollar on an average price of thirty five during the first week following issuance with underpricing persisting up to 6 months following issuance. The excess returns cannot be attributed to liquidity, high betas of underlying stock or excess volatility of convertibles following issuance. Conversely, volatility analysis indicates risk-adjusted excess returns are likely to be higher than reported.
Identifier: CFE0000079 (IID), ucf:46091 (fedora)
Note(s): 2004-08-01
Ph.D.
College of Business Administration, Department of Finance
This record was generated from author submitted information.
Subject(s): Convertibles
Preferred Stocks
Pricing
Performance
Persistent Link to This Record: http://purl.flvc.org/ucf/fd/CFE0000079
Restrictions on Access: campus 2008-01-31
Host Institution: UCF

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