Industry Conditions, Growth Opportunities, and Market Reactions to Convertible Debt Financing Decisions

This paper examines the relationship between convertible debt issue announcements, announcement period share price reactions, and the profitability of the issuing firm's growth opportunities. We find that investor reactions are positively related to the profitability of the issuing firm's investment opportunities. However, the relationship does not appear to be particularly robust across several model specifications. We then investigate the explanatory power of the issuer's relative performance within its own industry, and find that industry- adjusted growth opportunities appear to better explain investor reactions to convertible debt issues. Share price reactions are less negative (more positive) the higher the issuer's investment opportunities relative to that of the median industry performer. Thus, investors seem to react to convertible debt offerings more on the basis of relative performance with the issuer's industry, rather than absolute measures of issuer or industry performance.