1 Debt Issuance under Rule 144A and Equity Valuation Effects 1

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					                Debt Issuance under Rule 144A and Equity Valuation Effects

1. Introduction



       In this line of research we explore factors that affect the decision to issue corporate debt

under Rule 144A as opposed to issuing in the public market, a practice that has experienced

significant growth over the past few years. Based on our findings, we develop and test propositions

regarding the issuer’s stock behavior following the announcement of the method of the debt

financing. To our knowledge this is the first study that links an issuer’s motives for issuing debt

under Rule 144A with the market’s reaction following announcement. We believe our findings make

a significant contribution to our understanding of the particular market, and our results are of

particular importance to market participants, i.e., issuers, investors and regulators.

       The US Securities Act of 1933 stipulates that all offers and sales of securities must be

registered with the Securities and Exchanges Commission (SEC) unless a registration exemption is

available. The most common exemption used is a combination of Section 4(2) and Rule 144A of the

Securities Act. Section 4(2) provides an exemption to registration for securities that are only offered

privately, and do not constitute a “ public offering”. Thus, securities offered under Section 4(2) are

not eligible for resale. In April 1990 the Securities and Exchanges Commission (SEC) approved

Rule 144A which provided a further exemption to securities issued under Section 4(2). Under Rule

144A securities issued under Section 4(2) could be resold to certain qualified institutional buyers

(QIBs) as long as certain conditions are met. QIBs include sophisticated market participants such as




                                                  1
mutual funds, hedge funds, investment portfolios that meet certain size criteria.1

        Several papers have documented a tremendous increase in Rule 144A issuance since its

introduction. The increase is associated mainly with the high-yield corporate bond market. While less

than 15% of high-yield corporate bonds were issued through Rule 144A in 1993, by 1997 this

number had grown to more than 80 percent (Fenn, 2000). Livingston and Zhou (2002) suggest that

the increase seems to have come at the expense, at least partially, of the private placement market.

Total annual dollar value of new debt issues under Rule 144A grew from $3.39 billion in 1990 to

$235 billion (adjusted for inflation) by 1998. At the same time the traditional private placement

market shrunk from $110 billion in 1990 to $51 billion in 1998. Huang and Ramirez (2009a)

underline the importance of the Rule 144A market with respect to convertible bond issuance: while

less than 20 percent of convertibles were issued under Rule 144A in 1991, the percentage increased

to 89 percent by 2004. The existing literature provides two possible explanations for the growth in

the market: the first one suggests that speed of issuance is the main driving force behind the growth

in the market. Firms choose the particular market since it allows them to issue the securities quickly

thus, taking advantage of favorable conditions in the market. This is of particular importance to

lower credit quality firms trying to satisfy pressing needs. Fenn (2000) suggests that more than 80

percent of non-investment grade bond offerings in 1997 by US firms took place in the Rule 144A

market. Huang and Ramirez (2009a) document a migration of convertible debt offerings from the

public to the Rule 144A market during the period from 1991 to 2004; while in 1991, one year after

the introduction of Rule 144A, approximately twenty percent of convertible bonds were issued in the

Rule 144A market the number grew to more than 80 percent by 2004. The second explanation has to

do with lender specialization: QIBs which are sophisticated market participants have significant


1 For a more detailed description and the origins of the Rule 144A market please see Livingston and Zhou (2002),
                                                        2
advantages in producing and processing information as well as efficiencies in dealing with financial

distress. While these lenders are likely to obtain and exploit an informational monopoly over their

borrowers, it is possible that for non-investment grade borrowers the advantages of borrowing from

QIBs outweigh the disadvantages. Huang and Ramirez (2009b) find support for both the speed of

issuance and lender specialization arguments as main reasons for the tremendous growth in the Rule

144A market.

        A number of studies examine yield differential for domestic debt issuers between the public

and Rule 144A debt markets. Fenn (2000) finds that although present at the early stages of the 144A

debt market, yield premiums quickly vanished over time. He also finds that investors require a

premium from first-time issuers regardless of whether they issue in the public or the 144A markets.

Livingston and Zhou (2002), however, suggest that Rule 144A bond issues have higher yields to

maturity than publicly issued debt. They attribute this to lower liquidity of, information uncertainty

and weaker legal protection for investors. Chaplinsky and Ramchand (2004) examine differences for

international firms issuing debt in the US market. They find that while yields for investment grade

debt offered in the 144A market are higher than comparable issues offered in the public market, there

are no differences in high yield offerings in either market. They suggest the existence of a bifurcation

of the markets where high quality firms issue in both markets but face higher yield spreads in the

144A market and low quality firms that issue only in the 144A market. Ackert and Ramirez (2005)

compare yield spreads for public, Rule 144A and private collateralized obligations and their

determinants. Their evidence is consistent with yield premiums for Rule 144A over the public

collateralized obligations markets but lower premiums when compared to the equivalent private

market. With respect to the Rule 144A convertible bond market, Huang and Ramirez (2009a), after


Chaplinsky and Ramchand (2004) and Zoubek and Rosen (2008).
                                                    3
controlling for credit risk, asymmetric information, market conditions, and issue characteristics, find

no differences in gross spreads, offering yield and announcement effects between the 144A and

public convertible bond markets. Their results suggest that market participants view both markets as

comparable with similar issuing costs.

       While it is evident from the discussion above that previous research has focused mainly on

the characteristics of the debt issue, associated costs in the form of yields offered, and reasons for

issuing in the 144A market, very little has been done in terms of exploring the presence of any

wealth effects associated with debt issuance in the 144A market. Huang and Ramirez (2009a) find no

differences in announcement effects between the public and Rule 144A markets for firms issuing

convertible bonds for the period from 1991 to 2004. We present a comprehensive study of the

motives for issuing in one versus the other markets and explore differences in wealth effects

following announcement. Our main findings suggest that while for convertible bond issuers an

issuer’s prior stock run-up increases the probability of issuing in the Rule 144A market versus the

public market, for nonconvertible bond issuers the factors affecting the decision are related mostly to

taking advantage of favorable market conditions in general rather than the prior behavior of the

issuer’s stock. Consequently, we find that issuers of convertible bonds under Rule 144A experience a

negative stock reaction around the announcement day, over and above any reaction experienced by

issuers of convertible bonds in the public market. Our results are different than the ones suggested by

Huang and Ramirez (2009a) and this can probably be attributable to the fact that our study focuses

on a more recent, although overlapping, time period (2000 to 2006 versus 1991 to 2004) during

which convertible bond issuance under Rule 144A has experienced tremendous growth. On the

contrary, issuers of nonconvertible debt under Rule 144A experience a positive stock reaction around

the announcement day over and above any effects associated with issuance in the public market.

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       The rest of the paper is structured as follows: section 2 provides a description of our sample;

in section 3 we examine the factors affecting the choice between public and Rule 144A issuance; in

section 4 we explore differences in an issuer’s stock behavior around the announcement of the debt

issue while section 5 describes differences in the stock performance of firms issuing in the Rule

144A versus the public markets for a period of a year following the announcement of the debt issue.

Finally a summary of our findings is presented in section 6.



2. Data Description



       Our sample includes corporate US bond issues issued during the seven year period from 2000

to 2006. Detailed issue, issuer and issuance-related information were obtained from the Mergent

Fixed Investment Securities Database (FISD). Issuers’ stock prices prior and after bond issuance

were obtained from the CRSP database. Thus, our sample excludes issues that did not have any

matching stock in CRSP. It also excludes bonds with missing offer dates, missing identifiers with

respect to convertibility status and Rule 144A status, Yankees, foreign currency issues, Eurobonds or

agency type bonds. We also dropped issues under defeased or defaulted status. Table 1 provides

summary information for our sample. Overall our sample includes 3,764 non-convertible and 1,091

convertible issues for a total of 4,855 bonds. Of these bonds 3,010 were issued in the public market

(2644 non-convertible and 366 convertible) and 1,845 were issued under Rule 144A (1,120

nonconvertible and 725 convertible). The total offer amount for the 4,855 bond issues was

approximately $1.9 trillion of which almost 1.5 trillion was non-convertible. Public issues accounted

for approximately $1.27 trillion ($1.125 non-convertible and $147 billion convertible) and Rule

144A accounted for approximately $590 billion ($363 billion non-convertible and $227 billion

                                                 5
convertible).


3.     Prior Stock Run-Up and Choice between Rule 144A versus Public Issuance


       There is an extant body of literature examining whether managers are able to time the market

and lower the firm’s cost of capital. If managers are able to time the market, proxies of misevaluation

should be correlated with the timing of the security issuance decision. For example, Loughran and

Ritter (1995) and Spiess and Affleck-Graves (1995) find that companies issuing equity significantly

underperform the market for a period of five years after issuance. Spiess and Affleck-Graves (1999)

suggest that “firms that are overvalued are likely to issue securities of any type, and debt offerings,

like equity offerings, are a signal that the firm is overvalued” (pg. 46). Baker and Wurgler (2002)

suggest that market timing is an important aspect of real financing decisions and that capital structure

is the cumulative outcome of previous attempts to time the market. Elliot, Koeter-Kant and Warr

(2008) find empirical support that equity mispricing plays a significant role in the security choice

decision. They suggest that firms with overvalued equity are more likely to issue equity, while those

with fairly valued or undervalued equity are more likely to issue debt. Given its hybrid nature,

convertible bond issuance should also be influenced by similar factors. Lewis, Rogalski, and Seward

(2003) suggest that stock market reaction depends on the convertible security design and the extent

to which the security is debt-like versus equity-like.

       While a large number of studies examine the decision criteria with respect to the different

forms of financing, very few deal with the factors that affect the decision to issue under Rule 144A

versus the public market. We examine this issue for issuers of debt, both straight and convertible.

Speed of issuance in the Rule 144A versus the public debt market allows an issuer to exhibit a more

opportunistic behavior that takes advantage of favorable conditions that may exist. The conditions

                                                   6
can be related to the valuation of the issuer’s stock prior to the announcement of the issue or other

non stock related factors such as general favorable debt market conditions, pressing needs, etc. If

markets perceive that the choice of issuing under Rule 144A is based on the belief that the stock is

overvalued such issuance should be associated with negative stock effects following the

announcement of the issue. However, if the perception is that the firm is trying to take advantage of

favorable conditions in the market other than an overvalued stock then issuance under Rule 144A

should be associated with positive stock effects following the announcement of the debt issue under

Rule 144A. Lender specialization, also associated with the issuance under Rule 144A, enhances

these inferences. Normally, the presence of QIBs, and their superior ability to produce and process

information, should reduce information asymmetries which should result in a positive stock impact

following announcement. However, if the choice is perceived to be related to an overvalued stock,

the QIBs’ significant advantages in producing and processing information will allow them to take

advantage of such misevaluation through arbitrage strategies that they can easily develop. Capital

structure and convertible bond arbitrage are such examples.

       In order to determine whether prior abnormal stock behavior is associated with the choice of

the debt market, Rule 144A versus public, we employ an event study methodology approach and we

measure the issuer’s stock performance during a preannouncement period of 250 to three trading

days prior to the announcement day, [-250, -3]. With respect to the estimation of the stock

performance, Lyon, Barber and Tsai (1999) recommend using buy-and-hold abnormal returns

(BHAR), whereas Mitchell and Stafford (1998) and Fama (1988) favor cumulative abnormal returns

(CAR). In this paper we use the latter approach and we measure a stock’s excess market reaction

using the market model suggested by Brown and Warner (1985). Thus, over a period [t1,t2] we

calculate a stock’s CAR as

                                                 7
                                                     t2
                                     C AR t1 , t2          Ri ,t   Rm ,t ,
                                                    t t1



where Ri,t is the stock price return of the bond issuing firm i on day t, Rm,t is the return on the CRSP

value-weighted market index on day t, and t denotes the trading day relative to the event day.

        Our results are depicted in Table 2. In Panel A the sample is partitioned with respect to

convertibility status of the issued bond, and further partitioned with respect to whether issuance took

place in the public or Rule 144A markets. Convertible bonds are further classified with respect to the

moneyness of the embedded conversion option in Panel B; In line with the Lewis, Rogalski, and

Seward (2003) arguments we believe that this classification is important since when the option of the

convertible bond is deep out of the money the value of the embedded option is lower and the bond

behaves more like regular debt rather than equity; however the more the option is in the money the

more the bond should exhibit an equity-like behavior. In line with this observation, the stock of

bond-like convertible bond issuers should exhibit behavior similar to the behavior of other non-

convertible bond issuers. Ceteris paribus, the stock of equity-like convertible bond issuers should

exhibit behavior similar to other pure equity issuers. We classify the convertible bonds as bond-like

if the ratio of the bond’s conversion value to the bond’s par value is less than or equal to 80 percent

and equity-like otherwise.

        Our results provide strong evidence of a significant stock run-up during the [-250, -3]

window, both for firms issuing nonconvertible and firms issuing convertible debt. However, the run-

up associated with the issuance of convertible debt is significantly higher in general than the one

associated with the issuance of nonconvertible debt (CARs of 36.83% and 13.48% respectively). Our

results, although not adjusted for firm or issue specific characteristics, are in line with results in the



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prior literature.2 Furthermore, the stock run-up appears to be more pronounced for issuers in the Rule

144A market than the public and this persists in both the nonconvertible (CARs of 21.27 and 10.59

respectively) and the convertible (CARs of 41.07 and 28.22 respectively) markets. Not surprisingly,

as data in Panel B suggest, the run-up is much greater for the equity-like convertibles as compared to

bond-like convertibles. However, while differences in the stock run up between publicly and Rule

144A issued equity-like convertibles are non-significant, bond-like convertible issuers issuing in the

Rule 144A market exhibit significantly higher CARs than the ones issuing directly to the public

(CARs of 34.30 and 20.29 respectively).

        While this preliminary examination of CARs suggests the existence of some differences in the

pre-issuance stock behavior between firms issuing in the public versus the Rule 144A markets, it is

not clear whether these differences are due to the type of firm attracted in each of the two markets

and whether these differences persist after adjusting CARs for individual firm characteristics. After

all, as noted earlier, firms issuing in the Rule 144A market are mainly lower quality, higher yield,

non-investment grade issuers. In order to better assess the impact of prior abnormal stock behavior

on the choice of issuance in the public versus the Rule 144A markets we employ the following two-

stage regression:

        CAR[-250, -3]i = a + β1(Agei) + β2(Tobin’s_Qi) +β3[Ln(Mkt_Capi)] + β4(Debt_Ratioi)
              + β5(Voli) + β6(Fin_Flagi) + β7(Utl_Flagi) + εi                              (1)


        Rule _144A_Flagi = a + γ1(Adj_CARi) + γ2(Agei) + γ3(Tobin’s_Qi)
               + γ4[Ln(Mkt_Capi)] + γ5(Debt_Ratioi) + γ6(Voli) + γ7(Fin_Flagi)
               + γ8(Utl_Flagi) + γ9(TERM) + γ10(DEF) + γ11(Int_Rate) + γ12(TTMi)
               + γ13(Spreadi) + γ14(Rel_Sizei) + γ15(Conv_Ratioi) + εi                                     (2)


        Regression (1) adjusts a firm’s CAR observed during the pre-announcement period for


2 See for example Spiess and Affleck-Graves (1999), Mclaughlin, Safieddine, and Vasudevan (1998), Lewis,
                                                       9
specific firm i characteristics such its age on announcement date in years (Age), ratio of market value

to recorded assets value (Tobin’s_Q), the logarithm of its total market capitalization (Ln(Mkt_Cap)),

its debt ratio (Debt_Ratio), and the firm’s volatility prior to announcement (Vol). 3 Two dummy

variables are also included, one to denote a financial firm (Fin_Flag) and the other a utility firm

(Utl_Flag).

Our results suggest that Age, Tobin’s Q, Ln(Mkt_Cap), Debt Ratio, and Vol are all significant and

explain a significant portion of the CARs observed during the pre-announcement period.4

         Regression (2) is used to evaluate whether the unexplained portion of a firm’s CAR

(Adj_CAR) during the pre-announcement period, i.e., the unexplained residual from regression (1),

has any influence in the decision to issue in the Rule 144A versus the public markets along with

other firm specific, market specific and issue specific characteristics. Rule_144A_Flag, the

explanatory variable in regression (2), is a binary variable that takes the value of 1 if the firm issues

in the Rule 144A market and zero otherwise. As well as Adj_CAR, we also include the firm specific

characteristics from regression (1). In addition, general market characteristics at the time of the

announcement such as the difference between the ten- and the one-year constant maturity Treasury

yields (TERM), the difference between Moody’s Baa and Aaa rated corporate bond yields (DEF), and

the one-year constant maturity Treasury rate (Int_Rate) are included in the regression.5 Finally we

include a set of issue specific characteristics such as the total proceeds from the issue as a percentage

of total pre-issue capitalization (Rel_Size), time-to-maturity of the issue (TTM), the yield spread



Rogalski and Seward (2003).
3 Such firm specific characteristics in various forms have been used in prior studies to adjust returns. For example,
please see Ritter (1991). Kang and Lee (1996), Loughran and Ritter (1995), Spiess, and Affleck-Graves (1999),
Baker and Wurgler (2002).
4 While they are not included in the paper, results for the particular regression can be available upon request.
5 Livingston and Zhou (2002) and Huang and Ramirez (2009a) use the same or similar variables to capture debt
market conditions at the time of issuance.
                                                          10
between the offering yield of the issue and the yield on a Treasury of comparable maturity (Spread)

and the ratio of the bond’s conversion value to the bond’s par value (Conv_Ratio). Since the majority

of debt issued in the Rule 144A market is unrated, Spread serves as a proxy of the rating the issue

would have received had it been rated.6 As discussed earlier, Conv_Ratio is a measure of the

moneyness of the option embedded in the convertible bond. Given the binary nature of the dependent

variable, we use probit to estimate regression (2). Due to the hybrid nature of convertible bonds we

estimate separate regression estimates for non-convertible and convertible debt.



3.1     Factors Affecting Choice in the Nonconvertible Bond Market

        Results for regression (2) associated with the issuance of nonconvertible debt are depicted in

Table 3. Our results strongly suggest that pre-announcement unexplained cumulative abnormal

return (Adj_CAR) does not influence the choice between issuing in the Rule 144A versus the public

markets. The choice is influenced by specific firm characteristics such as the firm’s age, market

capitalization, leverage and risk. The coefficients of Age, Mkt_Cap, and Debt_Ratio are negative and

significant while Rel_Size, Spread is positive and significant suggesting that the Rule 144A market

attracts younger, smaller firms with relatively less leverage in their capital structure and lower

ratings (as proxied by Spread). These findings confirm previous assertions with respect to the

characteristics of firms issuing in the Rule 144A market. The negative coefficients of Fin_Flag and

Util_Flag suggest that financial and utility firms are less likely to issue in the Rule 144A market. The

negative and significant coefficient of Int_Rate suggests that firms issuing in the Rule 144A market

do try to take advantage of lower interest rates in the market since rising interest rates significantly

lower the probability of issuing in the Rule 144A market. However, market related variables such as


6 Huang and Ramirez (2009b) use an explicit procedure to rate unrated issues.
                                                        11
TERM and DEF do not appear to influence the decision regarding the choice between the Rule 144A

and the public markets.

        Thus far we have explored characteristics that affect the choice between issuing in the Rule

144A and public markets. However, even within the public market shelf-registration has recently

gained a lot of attention as a means of speeding up the issuance of a security. Shelf-registration, or

issuance under Rule 415, permits a corporation to file a registration for securities it intends to issue

within two years of the original registration. Thus, a firm can register an issue today and then sell the

securities in the future quickly as conditions and needs warrant. In this respect the public shelf-

registration market may be viewed as comparable to the Rule 144A market since it may offer similar

speed of issuance benefits to the issuer, once the firm has registered the securities. However, the two

markets, Rule 144A and public shelf-registration, are also different from each other in the sense that

Rule 144A allows for an immediate speedy issuance, thus taking advantage of ideal firm and market

conditions, while Rule 415 allows for a speedy issuance only if a firm has gone into the self-

registration process in the past. In order to investigate any differences in the factors affecting the

choice between Rule 144A and Rule 415, regression (2) is run on the sample of issuers under Rules

144a and 415 only. Our results, also depicted in Table 3, are very similar to previous ones when

issuance under Rule 144A is compared to issuance in the public market overall. One additional result

in this case, is that the coefficient of the yield spread between Baa and Aaa rated bonds (DEF) is

negative and significant which further confirms that timing of favorable market conditions is

enhanced in the case of issuance under Rule 144A and the speed of issuance it allows.

        Overall, our results suggest that with respect to nonconvertible bond issuers prior stock

performance does not appear to influence the decision to issue in the Rule 144A market versus the

public market. Our results suggest that firms issuing under Rule 144A as opposed to issuing in the

                                                   12
public market are younger, smaller, with lower debt levels but higher risk that try to take advantage

of favorable debt market conditions such as the level of interest rates and/or spreads between high

and lower quality issuers.



3.2    Factors Affecting Choice in the Convertible Bond Market

       There are some striking differences in results, depicted in Table 4, when the convertible bond

market is considered. Unlike the findings in the nonconvertible market, it appears that prior stock

run-up is the main factor that influences the decision to issue under Rule 144A as opposed to issuing

in the public market. The coefficient of Adj_CAR is positive and significant while other debt market

specific variables do not appear to influence the decision. When we compare issuance under Rule

144A with issuance under Rule 415 prior stock run-up is still an important factor affecting the

decision to issue under Rule 144A. In this case higher interest rates and a widening spreads between

10- and one- year Treasury yields (captured by Int_Rate and TERM respectively) lower the

probability of issuing under Rule 144A suggesting better timing with respect to general market

conditions under Rule 144A versus Rule 415 issuance.



4.     Debt Issuance under Rule 144A and Announcement Effects on the Issuer’s Stock



       The announcement effect of different corporate securities has been the subject of numerous

studies. For example, Mikkelson and Partch (1986) study the effects of equity issuance, Eckbo

(1986) provides a similar study for debt issuance, while Dann and Mikkelson (1984), Mikkelson and

Partch (1986), Billingsley, Lamy and Smith (1990) and Gosh, Varma and Woolridge (1990) provide

insight with respect to the issuance of convertible and exchangeable debt. Overall, the previous

                                                 13
literature suggests that while the issuance of non-convertible debt is associated with no significant

stock price reaction, the issuance of equity is associated with a significantly negative reaction of the

issuer’s stock price. Given its hybrid nature, the issuance of convertible bond is also associated with

a significantly negative reaction of the stock price. The negative reaction is more pronounced for

equity-like convertible issues (although smaller than that of pure equity issues) and less so for more

debt-like convertibles. These results support models proposed by Myers and Majluf (1984), Brennan

and Kraus (1987) and Kim (1990) that predict a negative relationship between the announcement

effect and the equity component at the issue.

       In this section we examine stock announcement effects of issuers of debt under Rule 144A as

opposed to issuers of debt in the public market. Given our analysis and results in section 3 we test

the following two propositions:

       P1:      The announcement of nonconvertible debt issuance under Rule 144A should have a
                positive effect on the issuer’s stock relative to effects that characterize issuance in the
                public market.


       Given the fact that the decision to issue nonconvertible debt under Rule 144A is associated

with an issuer’s attempt to take advantage of favorable debt market conditions rather than a prior

abnormal stock behavior as our findings in the previous section suggest and the reduction of

information asymmetry due to the presence of specialized lenders , we expect such announcement to

have a positive impact on the issuer’s stock when relative to any effects when financing takes place

in the public market.

       P2:      The announcement of convertible debt under Rule 144A should have a negative effect
                on an issuer’s stock relative to effects that characterize issuance in the public market.


       As determined in the previous section, the decision to issue a convertible bond under Rule


                                                   14
144A is influenced by an issuer’s prior stock run-up and, thus, associated with an opportunistic

behavior regarding the issuer’s equity valuation. In such case, the announcement of convertible bond

issuance under Rule 144A should have a negative impact on the issuer’s stock as compared to the

impact on issuers of convertible bonds in the public market.

       We assess the issuer’s stock behavior around announcement by calculating the issuer’s

cumulative abnormal residuals around a -2 to a +2 days window around the announcement day,

CAR[-2, +2], using the same methodology as in section 3. Preliminary results, unadjusted for firm

and issue characteristics, presented in Table 1, Panel A, suggest that issuance of non-convertible

bonds is associated in general with a positive stock reaction while issuance of convertible bonds is

associated with negative stock reaction around issuance day. However, these effects are more

pronounced for bonds issued in the Rule 144A market. The average CAR for the Rule 144A non-

convertible issues is 0.59 which is significantly higher than the average CAR for public non-

convertible issues (0.20 percent). With respect to the convertible market, firms issuing under Rule

144A exhibited average CAR of -3.27 percent versus average CAR of -1.15 percent if issuing in the

public market. When the sample of convertible bonds is further partitioned to bond-like and equity-

like in Panel B a distinct difference in an issuer’s stock behavior emerges: while for equity-like

issuers the difference in the CARs is insignificant (-1.96 percent for public versus -3.40 percent for

Rule 144A), there is a significant difference in CARs for bond-like convertible bond issuers. The

CAR for bond-like convertible bond issuers in the public market is positive (but insignificant) which

is more or less in line with the stock behavior of non-convertible issuers. However, the CAR for

bond-like convertible bond issuers in the Rule 144A market is negative and significant (-3.24

percent). It appears that while negative announcement effects associated with the issuance of

convertible bonds in the public market are present only when the issued convertible exhibits more

                                                 15
equity-like characteristics, Rule 144A convertible issuance is associated with negative announcement

effects irrespective of whether the issued convertible exhibits more straight debt or more equity-like

characteristics.

        As mentioned earlier, these results are “raw” results unadjusted for firm and issue specific as

well as general market characteristics. In order to test our hypotheses while accounting for such

characteristics we estimate the following regression:

        CAR[+2, +2]i = a + γ1(Rule _144A_Flagi) + γ2(Agei) + γ3(Tobin’s_Qi)
              + γ4[Ln(Mkt_Capi)] + γ5(Debt_Ratioi) + γ6(Voli) + γ7(Fin_Flagi)
              + γ8(Utl_Flagi) + γ9(TERM) + γ10(DEF) + γ11(Int_Rate) + γ12(TTMi)
              + γ13(Spreadi) + γ14(Rel_Sizei) + γ14(Shelf_Regi) + γ15(Conv_Ratioi) + εi           (3)


where CAR[+2, +2]i is the cumulative abnormal residual for firm i for the period of two days prior to

two days after announcement (calculated the same way as described in section 3) for all debt issuers,

Shelf_Regj is a dummy variable indicating issuance under Rule 415 with the rest of the variables as

described in regression (2). Regression (3) is estimated separately for nonconvertible and convertible

bonds and results are reported in Table 5. Consistent with P1, issuance in the nonconvertible market

under Rule 144A is associated with significant positive announcement effects. As a matter of fact

Rule _144A_Flag is the only variable that has explanatory power among all the variables used in our

regression model. Consistent with P2, our results, depicted in Table 5, suggest that the

announcement of convertible debt issuance under Rule 144A is associated with a significant negative

stock effect.

        It is possible that the announcement effects with respect to convertibles issued under Rule

144A can be attributed, at least partially, to convertible arbitrage strategies that have increased in

popularity during the last ten, fifteen years. The most common convertible arbitrage strategy

involves buying a company’s convertible bond and hedging the equity risk by taking a short position

                                                  16
in the company’s equity. The estimated number of convertible bond arbitrage hedge funds grew from

less than thirty in 1995 to more than 250 by the end of 2003 (Agarwal, Fung, Loon and Naik, 2009).

A number of papers have explored the efficiency of such convertible arbitrage strategies.7 Since

purchasers of Rule 144A securities are sophisticated QIBs, hedge funds among them, who have the

capability of putting in place such elaborate strategies, such activity might be a lot more intense in

the Rule 144A market than the public one. To assess whether such activity drives differences

between the public and the Rule 144A debt markets we calculate changes in short interest around the

announcement date. In particular we calculate the percentage change in short interest as the

difference between the short interest at the end of the announcement month and the average short

interest for the three months prior to the announcement month divided by the average short interest

for the three months prior to the announcement month. In general there is a significant percentage

increase in short interest for issuers in the convertible market. The percentage increase is

significantly higher for issuers in the Rule 144A versus the public market, 40.92 percent versus 22.16

percent. To investigate whether the negative announcement effect is associated with activities in the

convertible arbitrage market we repeat regression (3) including the percentage change in short

interest as an additional explanatory variable. The coefficient of the percentage change in short

interest is insignificant while the Rule_144A_Flag remains negative and significant suggesting that

convertible arbitrage cannot explain the negative announcement effect associated with issuance

under Rule 144A.



5.      Debt Issuance under Rule 144A and Post-Announcement Effects on the Issuer’s Stock




7 See for example Henderson (2005), Agarwal, Fung, Loon and Naik (2009), Fabozzi, Liu and Switzer (2009)
                                                     17
       Spiess and Affleck-Graves (1999) suggest that the market appears to under-react at the time

of the announcement of the debt issue and the full impact of the offering is realized over a longer

period of time. They find that both nonconvertible and convertible debt issuance is associated with a

negative stock reaction in the 5 year period following the debt issuance. The post-issue

underperformance of nonconvertible debt issuers is concentrated among smaller, younger, and

Nasdaq-listed firms. Lee and Loughran (1998) and Eckbo, Masoulis, and Norli (2000)report similar

results for convertible debt issuers. Henderson (2005) finds that convertible bond issuers outperform

a benchmark portfolio during the year following issuance although this pattern reverses when the

post-event window is extended to five years.

       We examine the post-announcement stock performance of issuers of debt under Rule 144A

versus issuers of debt in the public by calculating the abnormal cumulative residuals for both a +3 to

+125 trading days window and a +3 to +250 trading days window following the announcement of the

issue, CAR[+3, +125] and CAR[+3, +250]. Raw results, unadjusted for firm and issue specific as

well as market characteristics, are presented in Table 1. Issuers of nonconvertible bonds exhibit

positive stock reaction during both the [+3, +125] and the [+3, +250] post- announcement periods.

There are no differences between issuers in the public and the Rule 144A markets. For convertible

bond issuers, however, post-announcement stock performance is not significant for either period

considered. However, when the convertible sample is partitioned to bond-like versus equity-like

convertible issuers some distinct differences emerge. Post-announcement performance for bond-like

convertible issuers is positive and very similar to performance of regular non-convertible bond

issuers. There is no difference between issuers in the public versus the Rule 144A markets. For

equity-like convertible issuers, the post-announcement stock performance is negative (but not

significant) with CAR values of -1.89 percent and -4.55 percent for the [+3, +125] and [+3, +250]

                                                 18
periods respectively. There are no significant differences in this case between issuers in the public

and Rule 144A markets.

       In order to adjust our results for firm and issue specific as well as market characteristics, we

estimate regression (3) using CAR[+3, +250] as our dependent variable. Our results, depicted in

Table 6, suggest that there is no difference in the stock performance of issuers of debt under Rule

144A for the year following the announcement of the issue when compared to the stock performance

of issuers in the public market. The coefficient of Rule_144A_Flag, although negative, is

insignificant both for nonconvertible and convertible bonds.



6. Summary



       Prior literature with respect to debt issuance under Rule 144A has focused primarily on

the characteristics of the debt issue, associated costs in the form of yields offered. However, little

has been done in terms of exploring the presence of any wealth effects associated with debt

issuance in the 144A market when compared to issuance in the public market. In this study we

fill this gap by examining first whether the decision to issue debt under Rule 144A as opposed to

issuing in the public market is influenced by the issue’s stock behavior prior to the announcement

of the issue and second we examine announcement and post-announcement stock effects for

firms issuing debt under Rule 144A as compared to firms issuing debt in the public market.

       Our findings suggest that when it comes to issuing nonconvertible bonds prior stock run-

up does not influence the choice of issuing under Rule 144A versus issuing in the public market.

Issuers of straight debt under Rule 144A are younger, smaller and generally riskier firms that

attempt to take advantage of general favorable market conditions while they time their issuance

                                                 19
in order to take advantage of a prior stock run-up no more than their counterparts issuing in the

public market.

       Our results, however, are different when the convertible bond market is examined. It

appears that a prior stock run-up increases the probability of issuing under Rule 144A versus

issuing in the public market.

       With respect to differences in the announcement effect, issuers of nonconvertible debt

under Rule 144A experience a significant positive abnormal return when compared to their

counterparts issuing in the public market. The result can be attributed to a reduction in the

informational asymmetry that may exist given the lender specialization hypotheses and the

involvement of QIBs in the purchase of the security being issued. Unlike the nonconvertible bond

market however, there is a significantly negative stock return around the announcement of the

issuance of convertible debt under Rule 144A over and above any effects associated with the

issuance of convertible debt in the public market. This could be the market’s reaction to the

belief that firms issuing convertible under Rule 144A are exhibiting a more opportunistic

behavior especially since it is found that the decision to issue under Rule 144A is influenced by

an issuer’s prior stock run-up.

       Finally, our findings suggest that there are no differences in the stock performance of

issuers under Rule 144A versus issuers in the public market for a period of up to a year following

announcement. This result holds for both nonconvertible and convertible debt issuers.




                                                20
References

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increasing Importance of Collateralized Obligations,” Working Paper.

Agarwal, V., Fung, H. W., Loon, C. Y. and N. Y. Naik (2009): “ Risk and return in Convertible
Arbitrage: Evidence from the Convertible Bond Market,” Working Paper, Feb 2009 Version.

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Chaplinsky, S. and L. Ramchand (2004): “The Impact of SEC Rule 144A on Corporate Debt
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Dann, L.Y. and W. H. Mikkelson (1984): “Convertible Debt Issuance, Capital Structure Change and
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Eckbo, B.E. (1986): “Valuation Effects of Corporate Debt Offerings,” Journal of Financial
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Eckbo, B.E, Masoulis, R.W. and O. Norli (2000): “Seasoned Public Offerings: Resolution of the
New Issue Puzzle,” Journal of Financial Economics, 56, 251-291.

Elliott, B.W., Koeter-Kant, J. and R.S. Warr (2008): “Market Timing and the Debt-Equity Choice,”
Journal of Financial Intermediation, 17:2, 175-197.

Fabozzi, F.J., Liu, J. and L.N. Switzer (2009): “Market Efficiency and Returns form Convertible
Bond Hedging and Arbitrage Strategies,” The Journal of Alternative Investments, 11(3), 37-64.

Fama, E. F. (1998): “Market Efficiency, Long-Term Returns, and Behavioral Finance”, Journal of
Financial Economics, 49, 283-306.

                                               21
Fenn, G.W. (2000): “Speed of Issuance and the Adequacy of Disclosure in the 144A High-Yield debt
Market,” Journal of Financial Economics, 56, 383-405.

Gosh, C., Varma, R. and R. Woolridge (1990): “An Analysis of Exchangeable Debt Offers,” Journal
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Henderson, B. J. (2005): “Convertible Bonds: New Issue Performance and Arbitrage Opportunities,”
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Huang, R. and G.G. Ramirez (2009a): “The Rise of the Rule 144A Market for Convertible Debt
Offerings,” Financial Management, Forthcoming.

Huang, R. and G.G. Ramirez (2009b): “Speed of Issuance, Lender Specialization, and the Rise of the
144A Debt Market,” Working Paper, Available at http:/ssrn.com/abstract=1442131.

Kim, Y. O. (1990): “Informative Conversion Ratios: A Signaling Approach,” Journal of Financial
and Quantitative Analysis, 25(2), 229-243.

Lee, I. and T. Loughran (1998): “Performance Following Convertible Bond Issuance,” Journal of
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Lewis, C. M., Rogalski, R. J. and J. K. Seward (2003): “Industry Conditions, Growth Opportunities
and Market Reactions to Convertible Debt Financing Decisions,” Journal of Banking and Finance,
27, 97-119.

Livingston, M. and L. Zhou (2002): “The Impact of Rule 144A Debt Offerings Upon Bond Yields
and Underwriter Fees,” Financial Management, 31(4), pp. 5-27.

Loughran, T. and J. Ritter (1995): “The New Issues Puzzle,” Journal of Finance, 50(1), 23-51.

Lyon, J. D., B. Barber, and C. H. Tsai (1999): “Improved Methods for Tests of Market Efficiency,”
Journal of Finance, 54, 165-201.

McLaughlin, R., Safieddine, A., and G.K. Vasudevan (1998): “The Long-Run Performance of
Convertible Bond Issuers,” Journal of Financial Research, 21, 363-388.

Mikkelson, W. H. And M. M. Partch (1986): „Valuation effects of security offerings and the
issuance process,” Journal of Financial Economics, 15, 31 – 60.

Mitchell, M. L. and E. Stafford (1998): "Managerial Decisions and Long-Term Stock Price
Performance," Unpublished Working Paper, University of Chicago Business School

Myers, S. C. And N. S. Majluf (1984): “Corporate Financing and Investment Decisions When Firms
Have Information That Investors Do Not Have,” Journal of Financial Economics, 187-221.

                                               22
Ritter, J.R., (1991): “The Long-Run Performance of Initial Public Offerings,” Journal of Finance,
46, 3-27.

Smith, C.W. (1986): “Investment Banking and the Capital Acquisition Process,” Journal of
Financial Economics, 15, 3-29.

Spiess, D. K. and J. Affleck-Graves (1995): “Underperformance in Long-Run Stock Returns
Following Seasoned Equity Offerings,” Journal of Financial Economics, 38, 243-267.

Spiess, D. K. and J. Affleck-Graves (1999): “The Long-Run Performance of Stock Returns
Following Debt Offerings,” Journal of Financial Economics, 54, 45-73.

Zoubek, R. D. and B.J. Rosen (2008): “Securities and Exchange Commission Amendments to Rule
144 – Implications for Private Offerings of High-Yield debt Securities,” Capital Markets Law
Journal, June 2008, pp 1-16.




                                               23
Table 1. Description of Bond Sample

Panel A: Number of Issues Per Year

                       Non-Convertible                     Convertible
Issue Year         Public      Rule 144A              Public       Rule 144A    Total
     2000            311             74                 52              62       499
     2001            382            187                 51             110       730
     2002            382            149                 31              65       627
     2003            450            229                 51             191       921
     2004            366            217                 93             142       818
     2005            356            152                 39              72       619
     2006            397            112                 49              83       641
     Total          2644           1120                366             725      4855


Panel B: Amount and Other Bond Characteristics

                                Total Offer         Mean Offer      Mean        Mean
   Non-                           Amount             Amount        Maturity    Coupon
 Convertible     # of Issues     ($trillion)        ($million)     (years)      Rate
   Public           2644           1.125               426          9.73        5.72
 Rule 144A          1120           0.363               324          9.43        7.81
   Total            3764           1.488               395          9.64        6.34

 Convertible
   Public           366               .147             403          14.64       3.55
 Rule 144A          725               .227             314          14.98       3.23
   Total           1091               .375             343          14.86       3.34




                                               24
Table 2. Cumulative Abnormal Returns

Panel A: All Bonds
                                                          Period (in trading days)
Non-Convert.     Observations       -250 to -3        -2 to +2        +3 to +125       +3 to +250
   Public           2,288             10.59*           0.20*             3.22*           4.84*
 Rule 144A           849              21.27*           0.59*             3.72*           6.76*
 Difference                             *                 *
   Total             3137             13.48*           0.30*             3.35*            5.36*

 Convertible
   Public             330             28.22*           -1.15*            1.16              2.04
 Rule 144A            670             41.07*           -3.27*            1.47             -0.13
 Difference                             *                 *
   Total             1000             36.83*           -2.57*            1.37             0.59

 Difference                              *                *                *                *
 (in totals)


Panel B: Convertible Bonds
                                                       Period (in trading days)
 Bond-like       Observations       -250 to -3        -2 to +2        +3 to +125       +3 to +250
  Public             175              20.29*            -0.51             3.65           6.91*
 Rule 144A           446              34.30*            -3.24*            3.36*           2.71*
 Difference                             *                 *
   Total              621             30.35*           -2.47*            3.44*            2.38*

 Equity-like
   Public             149             38.00*           -1.96*            -2.52            -5.17
 Rule 144A            210             47.67*           -3.40*            -1.43            -4.12
 Difference
   Total              359             43.66*           -2.80*            -1.89            -4.55

 Difference                              *                                 *                *
 (in totals)


The event is the issuance of the bond (day zero). The cumulative abnormal stock return of the
issuer is calculated as the sum over all days in the period under consideration of the differences
between the daily return of the issuer’s stock and the return of the CRISP equally weighted
portfolio. * indicates significance at the 5% level. Difference refers to significance of the
difference in abnormal returns between public versus Rule 144A issuance.


                                                 25
Table 3. Choice between the Rule 144A and Public Market for Non-Convertible Debt Issuers
Probit Regression is used. The dependent variable equals one if debt issuance is under Rule 144A and zero otherwise.
The independent variables are the age of the firm on announcement date in years (Age), the ratio of market value to
recorded assets value (Tobin’s_Q), the logarithm of the firm’s total market capitalization (Ln(Mkt_Cap)), the firms’s debt
ratio (Debt_Ratio), the firm’s volatility prior to announcement (Vol), a dummy variable denoting a financial firm
(Fin_Flag), a dummy variable denoting a utility firm (Utl_Flag), the difference between the ten- and the one-year
constant maturity Treasury yields (TERM), the difference between Moody’s Baa and Aaa rated corporate bond yields
(DEF), the one-year constant maturity Treasury rate (Int_Rate), time-to-maturity of the issue (TTM), the yield spread
between the offering yield of the issue and the yield on a Treasury of comparable maturity (Spread), total proceeds from
the issue as a percentage of total pre-issue capitalization (Rel_Size), and the ratio of the bond’s conversion value to the
bond’s par value (Conv_Ratio).
                           Public Bonds                                      Public Shelf-Reg.
Variable             Coefficient         z-stat.                          Coefficient          z-stat.
Adj_CAR               0.0011582          (1.56)                            0.0014247           (1.53)
Age                  -0.0056028         (-3.74)                           -0.0049666           (-3.04)
Tobins_Q              0.0392284          (1.01)                            0.0318712           (0.72)
Ln(Mkt_Cap)          -0.2140156         (-8.88)                           -0.2517948           (-8.85)
Debt_Ratio           -0.5523034         (-3.67)                             -0.628362          (-3.61)
Volatility            0.0548924          (0.57)                            0.2700504           (2.07)
Fin_Flag             -0.8075234        (-10.28)                           -0.8618203          (-10.32)
Util_Flag            -0.3312504         (-3.63)                           -0.3455239           (-3.50)
TERM                 -0.0707073         (-0.82)                             -0.144349          (-1.50)
DEF                  -0.0835306         (-1.08)                           -0.2536119           (-2.92)
Int_Rate             -0.1170881         (-2.82)                           -0.1969127           (-4.28)
TTM                  -0.0036756         (-0.95)                           -0.0074547           (-1.73)
Spread                0.0794400          (5.65)                            0.1329477           (8.47)
Rel_Size              0.0006800          (2.52)                            0.0015600           (3.61)
Conv_Ratio
Constant               2.186029          (6.25)                              3.243681          (8.03)
             2
Psuedo R                     3104                                               0.3648
N                          0.2383                                                 2761




                                                           26
Table 4. Choice between the Rule 144A and Public Market for Convertible Debt Issuers
Probit Regression is used. The dependent variable equals one if debt issuance is under Rule 144A and zero otherwise.
The independent variables are the age of the firm on announcement date in years (Age), the ratio of market value to
recorded assets value (Tobin’s_Q), the logarithm of the firm’s total market capitalization (Ln(Mkt_Cap)), the firms’s debt
ratio (Debt_Ratio), the firm’s volatility prior to announcement (Vol), a dummy variable denoting a financial firm
(Fin_Flag), a dummy variable denoting a utility firm (Utl_Flag), the difference between the ten- and the one-year
constant maturity Treasury yields (TERM), the difference between Moody’s Baa and Aaa rated corporate bond yields
(DEF), the one-year constant maturity Treasury rate (Int_Rate), time-to-maturity of the issue (TTM), the yield spread
between the offering yield of the issue and the yield on a Treasury of comparable maturity (Spread), total proceeds from
the issue as a percentage of total pre-issue capitalization (Rel_Size), and the ratio of the bond’s conversion value to the
bond’s par value (Conv_Ratio).
                            Public Bonds                                     Public Shelf-Reg.
Variable               Coefficient        z-stat.                           Coefficient          z-stat.
Adj_CAR                 0.0019546         (2.34)                             0.0022314           (2.38)
Age                      0.000235         (0.07)                             0.0010248           (0.29)
Tobins_Q                0.0615703         (2.00)                             0.1074877           (2.60)
Ln(Mkt_Cap)            -0.1532341         (-3.65)                           -0.2027381           (-4.08)
Debt_Ratio              -0.416481         (-2.31)                           -0.3125451           (-1.48)
Volatility             -0.1349781         (-1.16)                           -0.1773909           (-1.37)
Fin_Flag               -0.1958947         (-1.45)                           -0.1722725           (-1.11)
Util_Flag              -0.0090366         (-0.04)                            0.2389467           (0.77)
TERM                   -0.0791065         (-0.55)                           -0.5139766           (-2.95)
DEF                     0.1983631         (1.43)                             0.1336221           (0.86)
Int_Rate               -0.1068688         (-1.40)                           -0.2654125           (-2.90)
TTM                    -0.0051564         (-0.85)                           -0.0097692           (-1.37)
Spread                 -0.0783304         (-3.00)                           -0.0925706           (-3.02)
Rel_Size                0.0000128         (0.08)                            -0.0001863           (-0.99)
Conv_ratio             -0.9113617         (-3.64)                             -1.035783          (-3.35)
Constant                   2.38165        (4.13)                               4.383818          (6.30)
             2
Pseudo R                      .0641                                                .0682
N                               972                                                   845




                                                           27
Table 5. Stock Effect around the Announcement of the Debt Issue
The dependent variable is the Cumulative Abnormal Return (CAR) during a -2 and +2 days window around
announcement. The independent variables are a dummy variable indicating whether issuance is under Rule 144A
(Rule_144A_Flag), the age of the firm on announcement date in years (Age), the ratio of market value to
recorded assets value (Tobin’s_Q), the logarithm of the firm’s total market capitalization (Ln(Mkt_Cap)), the
firms’s debt ratio (Debt_Ratio), the firm’s volatility prior to announcement (Vol), a dummy variable denoting a
financial firm (Fin_Flag), a dummy variable denoting a utility firm (Utl_Flag), the difference between the ten-
and the one-year constant maturity Treasury yields (TERM), the difference between Moody’s Baa and Aaa rated
corporate bond yields (DEF), the one-year constant maturity Treasury rate (Int_Rate), time-to-maturity of the
issue (TTM), the yield spread between the offering yield of the issue and the yield on a Treasury of comparable
maturity (Spread), total proceeds from the issue as a percentage of total pre-issue capitalization (Rel_Size), a
dummy variable indicating whether issuance is under Rule 415 (Shelf_Reg), and the ratio of the bond’s
conversion value to the bond’s par value (Conv_Ratio).
                              Non-Convertible Bonds                           Convertible Bonds
Variable                      Coefficient           z-stat.               Coefficient            z-stat.
Rule 144A_Flag                 0.6273025            (2.10)                   -1.91594            (-2.14)
Age                           -0.0014604            (-0.31)                -0.028963             (-1.37)
Tobins_Q                       0.0060673            (0.05)               -0.8022076              (-3.92)
Ln(Mkt_Cap)                   -0.1161031            (-1.65)                   1.31961            (4.56)
Debt_Ratio                    -0.1176596            (-0.27)                 2.636683             (2.19)
Volatility                    -0.2538232            (-0.73)                 2.108531             (2.67)
Fin_Flag                       0.0203528            (0.09)                 0.6109807             (0.66)
Util_Flag                     -0.2614711            (-0.90)              -0.6424842              (-0.38)
TERM                           0.3310071            (1.29)                 0.3488828             (0.38)
DEF                            0.1911807            (0.80)                 -2.532531             (-2.73)
Int_Rate                       0.1407725            (1.14)               -0.0910969              (-0.18)
TTM                           -0.0045597            (-0.43)              -0.0052547              (-0.13)
Spread                        -0.0206463            (-0.54)                0.0753263             (0.43)
Rel_Size                      -0.0009584            (1.13)                 0.0030786             (3.18)
Shelf_Reg.                     0.3924143            (1.37)               -0.3227307              (-0.31)
Conv_ratio                                                                 -4.583981             (-2.75)
Constant                      -0.1009148            (-0.09)                  -2.89905            (-0.76)
              2
Adjusted R                           0.001                                     0.0507
N                                     3104                                         972



                                                          28
Table 6. Post-Announcement Stock Performance for Issuers of Corporate Debt
The dependent variable is the Cumulative Abnormal Return (CAR) for a period of +3 and +250 trading days
after announcement. The independent variables are a dummy variable indicating whether issuance is under
Rule 144A (Rule_144A_Flag), the age of the firm on announcement date in years (Age), the ratio of market
value to recorded assets value (Tobin’s_Q), the logarithm of the firm’s total market capitalization
(Ln(Mkt_Cap)), the firms’s debt ratio (Debt_Ratio), the firm’s volatility prior to announcement (Vol), a
dummy variable denoting a financial firm (Fin_Flag), a dummy variable denoting a utility firm (Utl_Flag),
the difference between the ten- and the one-year constant maturity Treasury yields (TERM), the difference
between Moody’s Baa and Aaa rated corporate bond yields (DEF), the one-year constant maturity Treasury
rate (Int_Rate), time-to-maturity of the issue (TTM), the yield spread between the offering yield of the issue
and the yield on a Treasury of comparable maturity (Spread), total proceeds from the issue as a percentage
of total pre-issue capitalization (Rel_Size), a dummy variable indicating whether issuance is under Rule 415
(Shelf_Reg), and the ratio of the bond’s conversion value to the bond’s par value (Conv_Ratio).
                                 Non-Convertible Bonds                        Convertible Bonds
Variable                       Coefficient            z-stat.            Coefficient            z-stat.
Rule_144A_Flag                 -0.6048661            (-0.29)              -2.435967             (-0.56)
Age                               0.213077            (0.64)              0.1057362             (1.03)
Tobins_Q                       -0.5159367             (6.15)              -1.475501             (-1.48)
Ln(Mkt_Cap)                      -3.413146           (-6.83)              -2.641879             (-1.88)
Debt_Ratio                        4.759546            (1.54)               12.29824             (2.10)
Volatility                       -4.255499           (-1.73)              -5.115818             (-1.33)
Fin_Flag                          -3.90477           (-2.34)               0.243245             (0.05)
Util_Flag                        -9.534415           (-4.65)              -2.707578             (-0.33)
TERM                              8.333845            (4.57)              -4.734404             (-1.05)
DEF                               2.283057            (1.35)               7.500021             (1.66)
Int_Rate                          5.143397            (5.88)              -1.498744             (-0.62)
TTM                            -0.0075122            (-0.10)              0.0312103             (0.16)
Spread                           -1.139189           (-4.20)              0.6891962             (0.81)
Rel_Size                       -0.0169144            (-2.82)             -0.0116679             (-2.47)
Shelf_Reg.                        0.748164            (0.37)                -2.22394            (-0.44)
Conv_ratio                                                                -17.26641             (-2.13)
Constant                          12.43513            (1.63)               37.25982             (2.01)
Adjusted R2                           .0541                                   0.0565
N                                      3104                                       972


                                                          29

				
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