TY - JOUR
T1 - Why do convertible issuers simultaneously repurchase stock? An arbitrage-based explanation
AU - de Jong, Abe
AU - Dutordoir, MDRP (Marie)
AU - Verwijmeren, Patrick
PY - 2011
Y1 - 2011
N2 - Over recent years, a substantial fraction of US convertible bond issues have been combined with a stock repurchase. This paper explores the motivations for these combined transactions. We argue that convertible debt issuers repurchase their stock to facilitate arbitrage-related short selling. In line with this prediction, we show that convertibles combined with a stock repurchase are associated with lower offering discounts, lower stock price pressure, higher expected hedging demand, and lower issue-date short selling than uncombined issues. We also find that convertible arbitrage strategies explain both the size and the speed of execution of the stock repurchases.
AB - Over recent years, a substantial fraction of US convertible bond issues have been combined with a stock repurchase. This paper explores the motivations for these combined transactions. We argue that convertible debt issuers repurchase their stock to facilitate arbitrage-related short selling. In line with this prediction, we show that convertibles combined with a stock repurchase are associated with lower offering discounts, lower stock price pressure, higher expected hedging demand, and lower issue-date short selling than uncombined issues. We also find that convertible arbitrage strategies explain both the size and the speed of execution of the stock repurchases.
U2 - 10.1016/j.jfineco.2010.10.016
DO - 10.1016/j.jfineco.2010.10.016
M3 - Article
SN - 0304-405X
VL - 100
SP - 113
EP - 129
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 1
ER -