Why do convertible issuers simultaneously repurchase stock? An arbitrage-based explanation
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.
|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|
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