Defining the level of abnormal return underperformance that exists for issuers of high-yield bonds

Abstract

A great deal of academic research focuses on how bond issuance impacts the firm. Most recent research focuses on investment grade bonds and ignores noninvestment grade bonds. This article investigates the long-run stock underperformance of high-yield bond Initial Bond Offerings (IBOs) in the 3–5-year post-issuing period compared to firms that do not issue stock and/or bonds over the same 5-year post period. A second dataset featuring investment grade bond issuing firms is also compared to firms that do not issue stocks and/or bonds over the same 5-year post period. It is determined that stock underperformance does exist following bond IBOs using both the buy-and-hold return and Fama–French Four-Factor models. The level of underperformance is found to be greatest for callable bonds issuers followed by straight bonds and convertible bond issuers. Additionally, it is learned that high-yield bond issuing firms experience a greater level of underperformance than their investment-grade counterparts. This line of research partially fills the gap in understanding how noninvestment grade bonds impact the firm in both stock performance and the pricing decision.

Notes

¹ Issuances of straight bonds are defined as not being callable nor have a convertible feature.

² A bond issuance can be represented in the bond IBO category as well as being callable or convertible.

³ Firms will be matched with firms of the same exchange where its equity is traded.

⁴ The market capitalization is calculated by share price times the number of shares outstanding.

⁵ The BM ratio is calculated by dividing the book equity value by the market capitalization.

⁶ The factors are available for download at Kenneth French's website: http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

⁷ This is calculated by multiplying the level of underperformance times 36 months.

⁸ All the results presented are significant at the 99% confidence level.