Frequency and sequence: convertible debt issuance announcement effect on stock returns

Convertible debt that shares the characteristics of debt and equity is
perceived to be riskier than straight debt, therefore the issuance announcement
tends to lead to adverse market reaction. In this study we show that convertible
debt issuance announcement is also associated with negative abnormal returns
with evidence from the Malaysia capital market. We argue that the
substantially smaller and illiquid convertible debt market do not affect the
consistency of the findings. However, the main purpose of this study is to
examine the effect of frequency and sequence of convertible debt issuance
announcement on the issuers stock return. We find that both the frequency and
sequence of issuance significantly affect the announcement returns. In the
longer event window, we observe negative abnormal returns for the infrequent
issuers. While frequent issuers report positive abnormal returns. Looking at the
sequence of issuance, the first issues of convertible debt lead to negative
market reaction, but as the information gap decreases, subsequent issues of
convertible debt lead to insignificant abnormal returns. We argue that the
findings of this study are mainly related to the theories of asymmetric
information and sequential financing. In brief, this study contributes to the
convertible debt literature by highlighting the need to incorporate the effect of
frequency and sequence in examining the announcement effect of securities.
Furthermore, this study adds that the additional features of convertible debt
such as redeemable, non-redeemable, secured and unsecured do have
significant impact on the announcement returns.