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The Information Content of Calls of Convertible Preferreds: The Evidence from Earnings Forecasts

This paper examines the impact of the announcement of convertible preferred calls on earnings forecasts by financial analysts. Our results show that in-the-money calls are associated with no change in either forecasted earnings or forecasted long-term earnings growth. In addition, we find that the abnormal return around the announcement of the call is uncorrected with changes in earnings or long-term growth rates. Similar results are obtained from the analysis of earnings changes around out-of-the-money calls. Out-of-the-money calls, however, are associated with marginally significant increases in forecasts of long-term growth, but these increases are not correlated with the announcement period abnormal returns. These results suggest that any information inherent in convertible preferred calls is not associated with future earnings. Therefore, they are more consistent with the Jensen free-cash-flow hypothesis than the Harris-Raviv signaling hypothesis.