Announcement effects of convertible bond loans versus warrant-bond loans: An empirical analysis for the Dutch market

1. Introduction

In making their capital structure decisions firms can choose to issue securities which have both
equity and debt components rather than to issue pure equity or debt. Both convertible bond loans
and warrant-bond loans share this characteristic. Studies of announcement effects with regard to
convertible bond loans (from now on CBs) and warrant-bond loans (from now on WBs) confirm
the hybrid nature of these finance instruments. Dann and Mikkelson (1984) present a summary
table of the relevant literature which shows the following results. First, the issuance of new debt
does not lead to any significant stock price reaction. Second, the issuance of new equity leads to a
significantly negative stock price reaction. Finally, the issuance of a CB, which has elements of
both debt and equity, leads to a significant stock price decline which is smaller than the decline
associated with the issuance of pure equity. As far as we know announcement effects of hybrid
debt instruments have sofar only been investigated for the United States. In this paper we will
investigate these announcement effects for another capital market, i.e. the Dutch capital market.

First we take a closer look at previous studies in which the reaction of shareholders on
announcements of CBs and WBs is measured. In these studies the common stock returns on the
day before the announcement is published in the financial press (day -1) and the announcement
day itself (day 0) are calculated. These are corrected for the "normal returns" on the same stock.
The resulting differences are the abnormal returns caused by the announcement. In table 1 the
cumulative average abnormal returns for days -1 to 0 as found in these studies are summarized.

[Insert Table 1]

From table 1 it can be concluded that all studies find significant negative stock price
reactions to announcements of CBs. The fact that all studies find a significant negative effect is not
surprising because all the studies use at least partly the same data-set, i.e. announcements of the
issuance of CBs in the United States. Differences between these cumulative abnormal returns can
be explained from differences in the research period, the sample selection criteria and the event
period. The results for WBs are mixed. Long and Sefcik (1990) find a significant negative stock
price reaction, while Jayaraman et. al. (1990) and Billingsley et. al. (1990) find negative, but
insignificant, stock price reactions. This leads Billingsley et. al. (1990) to conclude that by using
WBs firms have a ’penalty-free’ issuance of an equity-like security. The term ’penalty-free’ is used
because normally the issuance of new equity is followed by a decline in the stock price.

In this study announcement effects of CBs and WBs are investigated for the Dutch capital
market. These effects are studied for 47 CBs and 19 WBs issued from 1976 to 1994. The event
study analysis leads to a positive but insignificant effect on the stock price for the announcement

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