Peter Carayannopoulos
Associate Dean, Wilfrid Laurier University, Canada.
Subhankar Nayak
Assistant Professor, Wilfrid Laurier University, Canada.Debt Issuance under Rule 144A and Equity
Valuation Effects
The paper examines equity valuation effects associated with issuing
debt under SEC Rule 144A. Our results reveal that while issuers of
nonconvertible debt under Rule 144A experience positive stock
announcement effects, issuance of convertible debt under Rule 144A is
associated with negative stock reactions around the debt financing
announcement dates. These reactions are over and above any stock
reaction associated with the issuance of debt in general, convertible or
non-convertible, that has been documented in the prior literature. We
explain the excess reaction by investigating differences in the motives
for issuing debt under Rule 144A versus issuing debt in the public
market. Our findings suggest that while issuers of non-convertible debt
under Rule 144A try to benefit from generally favorable debt market
conditions, the decision to issue convertible debt under Rule 144A
appears to be influenced by an issuer’s prior stock price run-up which
can be interpreted by investors as the issuing firm’s attempt to time the
market. We believe our results provide a significant contribution to our
understanding of the particular market.