Shabnam ayarehgar - Department of Accounting, College of Graduate, Kermanshah Branch, Islamic Azad University,Kermanshah, Iran
Babak Jamshidinavid - Department of Accounting, Kermanshah Branch, Islamic Azad University, Kermanshah, Iran
Farshid Khairollahi - Department of Accounting, College of Graduate, Kermanshah Branch, Razi University, Kermanshah,Iran

In this paper we provide the first comprehensive examination of the stock price reaction to announcements of convertible preferred stock repurchases over the 1981 to 2005 period. We document a positive and significant average common stock abnormal return of 3.27% aroundannouncements of these repurchases.We test signaling and free cash flow explanations for the observedwealth effects by studying abnormal returns and changes in operating performance around repurchase announcements. We develop a positive behavioral portfolio theory (BPT) and explore its implications for portfolio construction and security design. The optimal portfolios of BPT investors re-semble combinations of bonds and lottery tickets, consistent with Friedman and Savage's (1948) observation. We compare the BPT efficient frontier with the mean-variance effi-cient frontier and show that, in general, the two frontiers do not coincide. Optimal BPT portfolios are also different from optimal CAPM portfolios. In particular, the CAPM two-fund separation does not hold in BPT. We find that abnormal returns are positively related to size of repurchases and managerial ownership. Wefind no evidence of higher stock price reactions for low-q and high free cash flow firms. In addition,we find significant improvements in accounting profitability subsequent to repurchases, but not for low-q firms. Collectively, our results are most consistent with the signaling hypothesis.

portfolio theory, Calls of convertibles, stock returns, Signaling, Free cash flow