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.

Additional Metadata
Keywords Convertible arbitrage, Convertible debt, Short selling, Stock repurchase
Persistent URL dx.doi.org/10.1016/j.jfineco.2010.10.016, hdl.handle.net/1765/22755
Series ERIM Top-Core Articles
Journal Journal of Financial Economics
Citation
de Jong, A, Dutordoir, M.D.R.P, & Verwijmeren, P. (2011). Why do convertible issuers simultaneously repurchase stock? An arbitrage-based explanation. Journal of Financial Economics, 100(1), 113–129. doi:10.1016/j.jfineco.2010.10.016