Convertible bond calls revisited: An examination of the wealth transfer motive for call policy.

摘要

The optimal call policy for a convertible bond in a perfect capital market is to call as soon as the convertible bond's market price rises to equal the contractual call price, according to Ingersoll (1977a) and Brennan and Schwartz (1977). The motivation for this call policy is the potential transfer of the value of the bondholders' call option to shareholders. I revisit the question of when it may be optimal for a firm to call a convertible bond by focusing on the actual value of the conversion option impounded in bond prices, following the method of Byrd et al. (1998). I also examine the nature of the 20 percent safety premium of Asquith (1995) and its relation with the option premium.; For a sample of 26 convertible bonds that traded during 1995–1997, I find no persistent violations of the wealth transfer call policy recommendation. For days when these bonds were callable and in the money, the average net option premium (the market price less the bond's conversion value) is positive, but these premia do not persist for periods that are long enough to allow the firm to call the bond in order to capture wealth. It appears that bondholders are reluctant to bid up the prices of bonds that can be called away at any time. In addition, I find that the safety premium (the conversion value less the call price) does not often remain greater than or equal to 20 percent for long enough to call the bond. I also present evidence that the net option premium is generally nonpositive when the safety premium is at or above the recommended 20 percent.