| dc.description.abstract | We use the US convertible bond issued in 1980 to 2007 as our sample selection. If the convertible bonds belong to speculative grade, the stock liquidity increases gradually during the pre-filing period. After issuing convertible bond, the stock has high liquidity for eighteen months and decreases little by little. However, if the convertible bonds belong to investment grade, the change of liquidity is relatively small during the pre-filing and post-issuing period. Firms prefer to issue convertible bonds when stocks have high liquidity, because of low information asymmetry and low monitoring costs of debt holders. Previous literatures mention, there are abnormal negative returns after the convertible bond events. We use Liu’s (2006) LCAPM to examine the convertible bond issuer’s monthly stock returns. No matter what the convertible bond grade is, convertible bond firms still show an increase in abnormal returns prior to convertible bond filing, but the monthly abnormal returns after issuing the convertible bonds are insignificantly different from zero. In pre-filing six months, the market risk and liquidity risk decline to the lowest in month -1 or -2, which makes the cost of equity becomes lower. Because the liquidity of the stocks during post-issuing is higher than pre-filing period, the liquidity risks decline. Besides, both market risk and liquidity risk decrease during the post-issuing months, which means the individual stocks facing lower systematically risk, and investors will require lower risk premium. Furthermore, the decreasing risk of the speculative convertible bond is much more than investment convertible bond.
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