conversion premium

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Conversion premium

The extent by which the conversion price of a convertible security exceeds the prevailing common stock price at the time the convertible security is issued. In general usage, the conversion premium is the amount by which the convertible security trades above its conversted value. For example, if a $1,000 par bond is trading at $1,100, it is convertible into 50 shares, and the shares are trading at $21, the converted value is 50 X 20.50 = $1,025, and the conversion premium is $75.

Conversion Premium

The amount by which a convertible security is trading above the common stock into which it may be converted. Most convertible securities trade at a conversion premium, though it usually lessens as the common stock increases in price.

conversion premium

The excess at which a convertible security sells above its conversion value. The conversion premium usually declines as a convertible security rises in market price. A bond trading at $1,400 and convertible into 50 shares of common stock with a current market price of $22 each sells at a conversion premium of $1,400 - (50 × $22), or $300.
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We now develop the implications of the asymmetric information hypothesis for subsamples of firms issuing putable convertibles based on conversion premium (i.
Finally, firm insiders can signal their type (private information) using a combination of two signals: 1) the choice of security to issue and 2) the conversion premium (if they choose to issue a convertible, is it putable or ordinary).
First, the announcement effects in the equity market of putable convertible issues with a high conversion premium relative to a matched set of ordinary convertible issues will be more favorable than that of putable convertible issues with a low conversion premium (H7).
Next, we test the asymmetric information hypothesis H7, which predicts that the announcement effects of putable convertible issues with a high conversion premium relative to a matched set of ordinary convertible issues will be more favorable than those of putable convertible issues with a low conversion premium relative to a matched set of ordinary convertible issues.
Next, we test the asymmetric information hypothesis H9, which predicts that the postissue operating performance of firms issuing putable convertibles with a high conversion premium will be better than that of firms issuing putable convertibles with a low conversion premium.
Further, Panels D and E of Table VI present z-statistics testing whether the yearly distribution of the differences in operating performance ratios from nonissuing matched firms are equal for firms issuing putable convertibles with a high conversion premium and ordinary convertible issuers (Panel D) and for firms issuing putable convertibles with a low conversion premium and ordinary convertible issuers (Panel E) using the Wilcoxon two sample rank-sum test.
Next we test the asymmetric information hypothesis H8, which predicts that the average market valuation of firms issuing putable convertibles with a high conversion premium prior to the issue will be lower than that of firms issuing putable convertibles with a low conversion premium.
Further, Panel C of Table VII demonstrates that the median P/V ratios of firms issuing putable convertibles with above median conversion premium are smaller than those of ordinary convertible issuers.
Thus, our results in Panels B, C, and D of Table VII provide an indication that firms issuing putable convertibles with above median conversion premium are somewhat more undervalued as compared to firms issuing putable convertibles with below median conversion premium.
16) We thank an anonymous referee for suggesting that we conduct an analysis of subsamples of firms issuing putable convertibles based on their conversion premium (i.