The Optimal Call Policy for Convertible Bonds: Is There a Market Memory Effect

This paper examines the market memory effect in convertible bond markets. We look at the pricing of convertible bonds issued after the original issuer redeemed previous issues without giving an opportunity for investors to benefit from bond value appreciation. We find some evidence that the market underprices new convertible bond issues of firms that called their previous convertible bonds early compared to new convertibles bonds of firms that called their previous convertibles late. In addition we find that the equity-like bonds of early calling firms are more underpriced than debt-like bonds of the same firms.