Barclays study defies myth of negative stock impact from convertible issues

By Ronda Fears

Nashville, Sept. 3 - A new Barclays Capital Markets study out Wednesday breaks a common barrier to convertible issuance by refuting the myth of a negative stock price impact. Convertible analysts Luke Olsen, Henrik Immelborn and Ana Maria Wood authored the report.

"We find some empirical evidence that for European, U.S. and Asian convertible issues the immediate reaction to the announcement on the underlying stock is negative," the analysts said in the report.

Analysts attributed the immediate negative impact to short selling of the stock by hedge funds and from the potential dilution caused by the convertible.

"Contrary to the myth, however, this effect is short-lived and the data clearly illustrates that the impact is broadly neutral to slightly positive over a period of six weeks (two weeks before and four weeks after the announcement)."

Convertibles are an increasingly popular source of finance as they provide an issuer with a lower cost of debt in exchange for granting investors an option on its stock. But one of the main concerns for issuers is the prevailing view that a convertible issue will negatively affect share price performance.

"We find very little evidence to support the myth that a convertible issue would negatively affect share price performance," the analysts said.

The study is based on 718 convertible and exchangeable bond issues across countries grouped into the regions Europe, the U.S. and Asia.

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