Skip to main content
Article
The Importance of Call Delays and Cash Flow Positions in Evaluating the Information Content of Convertible Preferred Stock Calls
Journal of Accounting, Auditing, & Finance
  • L. Paige Fields
  • Michael S Wilkins, Trinity University
  • Eric L. Mais
Document Type
Article
Publication Date
4-1-1999
Disciplines
Abstract

We examine a sample of in-the-money convertible preferred stock calls and find that they are delayed. We find that the length of the call delay does not depend on the relation between the preferred stock dividends and the pro rata common dividends to be paid on conversion. Thus, our evidence suggests that preferred stock calls may be used for signaling purposes. In support of this, we find that only delayed calls (i.e., those with potential signaling elements) are viewed negatively by equity investors. We also show that, in responding to delayed call announcements, investors appear to react to two distinct information elements. First, price responses to delayed calls are increasingly negative the larger the cash flow disadvantage to calling. In other words, common investors respond more negatively to calls when the forced conversion results in convertible holders receiving larger dividends than were previously required. Second, both cash flow advantage and cash flow disadvantage firms experience significant downward shifts in earnings growth during post-call periods, suggesting that delayed calls are timely signals of decreasing profitability.

Document Object Identifier (DOI)
10.1177/0148558X9901400204
Citation Information
Fields, L.P., Wilkins, M.S., & Mais, E.L. (1999). The Importance of Call Delays and Cash Flow Positions in Evaluating the Information Content of Convertible Preferred Stock Calls. Journal of Accounting, Auditing, & Finance, 14(2), 163-183. doi: 10.1177/0148558X9901400204