Decision Sciences Journal
Volume 31, Number 1
Winter 2000
Underwriting and Calls of Convertible Bonds
Arnold R. Cowan
Iowa State University, Ames, IA 50011-2065, email: arnie@iastate.edu
Nandkumar Nayar
University of Oklahoma, Norman, OK 73019-0450, email: nnayar@ou.edu
Ajai K. Singh
Case Western Reserve University, Cleveland, OH 44106-7235, email:
aks8@po.cwru.edu
Abstract. We model convertible bond calls under asymmetric
information where, unlike Harris and Raviv (1985), we consider
a nonzero call price and a call notice period. In the model,
the use of underwriters conveys negative information. Consequently,
the stock price decline is greater for underwritten calls than
for nonunderwritten calls. Furthermore, underwritten calls are
made earlier and when the conversion option is less deep in the
money. Underwriting commissions and the stock price decline associated
with a call are negatively related to the extent that the conversion
option is in the money before the call. Empirical evidence in
this paper and Singh, Cowan, and Nayar (1991) are consistent
with the model’s predictions.
Subject Areas: Corporate Finance, Financial Models,
Game Theory, Investment Banking, and Signaling. |