First we consider the ratio of new equity to be issued upon conversion or warrant exercise
(St) and the average market value of equity 15 to 11 days before the announcement (St-15t-11, from
on to be referred to as the market value of equity). This ratio is defined as Snew. We take the
average market value of equity 15 to 11 days before the announcement in order for the stock price
not to contain any announcement effects of the issue itself. The market value of equity is
determined by multiplying the number of outstanding shares (derived from the respective issuance
prospectuses) by the average share price of 15 to 11 days before the announcement (derived from
Datastream or Het Financieele Dagblad). The ratio Snew is on average 21.7% for CBs while it is
only 15.5% for WBs.
We also calculate the ratio of new equity (St) and the nominal value of new debt at the
issuance (Bt). This ratio is defined as SB. In case of CBs, this ratio is usually equal to 1. Only if
the issuing company includes a provision that upon conversion an additional payment is required,
or on the contrary a repayment is granted, the ratio will be different from 1. In case of WBs there
is a priori no reason to determine a ratio SB of 1, because after the issuance the bonds and
warrants are separated. Long and Sefcik (1990) find a ratio of 65% for WBs issued in the United
States. The ratio SB is calculated for the CBs and WBs in our sample. Not surprisingly this ratio is
on average 100% for CBs. For WBs this ratio is 94%. This is lower than the ratio for CBs, but
much higher than the ratio for WBs issued in the United States. For the WBs in our sample the
ratio SB varies from 20% to 148%. Moreover it is never equal to 100%.
In summary, although WBs can be constructed in such a way that they are in fact identical
to CBs, in practice these two kinds of securities are structured in a somewhat different way. This is
the case both for securities issued in the United States and for securities issued in the Netherlands.
Regression analysis
If we want to investigate the differences in the announcement effects of WBs and CBs, we should
take the differences between the structure of these securities into account. In order to do so, we
estimate the following regression equation:
CAR1i = β0+ β1*Snew,i + β2*SBi + β3*dumi + εi, (3)
where:
CAR1i = the Cumulative Abnormal Return for firm i on event-day +1.
Snew,i = the maximum amount of new equity relative to the market value of the
equity.