STOCK REACTION TO DIVIDEND SAVINGS OF CONVERTIBLE PREFERRED CALLS - FREE CASH FLOW OR PRICE PRESSURE EFFECTS

Calls of in-the-money convertible preferred stock typically induce div idend savings for the firm, since preferred dividends exceed common st ock dividends, Prior research finds that these savings are negatively related to stock returns at call announcement and argues that the mark et expects managers to abuse the increased free cash flow. This paper finds that dividend savings are closely related to call size, suggesti ng other explanations, Larger calls experience a more negative announc ement reaction. Consistent with temporary liquidity effects, there is a price reversal during the conversion period, which is greater for la rger calls.