Stub stock

Stub Stock

A common stock in a publicly-traded company that the company has converted from a bond. A company converts its bonds to stub stocks when it has a negative net worth, either because of a takeover or a bankruptcy. The name "stub stock" probably derives from the fact that the common stock is typically worth much less than the bonds from which it has been converted. Because of the price uncertainty surrounding companies that issue stub stocks, they are risky investments. However, if the company recovers, they have the possibility of a high rate of return.

Stub stock.

When a company has a negative net worth as a result of being bought out or going bankrupt, it may convert some of the bonds it has issued into shares of common stock.

Perhaps because each share is worth only a portion of the original bond's value, this new stock is known as stub stock.

The issuing company's financial instability makes stub stock a volatile investment. But if the company regains its strength, stub stock can increase dramatically in value.

Mentioned in ?
References in periodicals archive ?
In fact, LRs proved to be a viable defense for many companies involved because the value offered to shareholders in the LR - the combined value of an up-front cash payment plus the market value of retained equity interest in the firm (the "stub stock") - was greater than the price that third-party acquirers are willing to pay.(4) Even if the insiders do not end up with a controlling interest, the fact that they are willing to increase their percentage ownership in the firm is a signal to the market that they think the firm may do well.
Central to a major LR plan is the firm's capacity to deliver value to shareholders through a debt-financed cash distribution and stub stock value.