By buying convertibles and shorting the underlying stock, hedge funds distribute equity exposure to well-diversified shareholders. We find that firms with characteristics that make seasoned equity offerings expensive are more likely to issue convertibles to hedge funds. We conclude that hedge funds provide opportunities for firms to issue convertible securities at a lower cost than seasoned equity by serving as relatively low-cost distributors of equity exposure. A higher fraction of a convertible is privately placed with hedge funds when institutional ownership, stock liquidity, issue size, concurrent stock repurchases, and limitations on callability suggest that shorting costs will be lower.

convertibles, hedge funds
Financial Institutions and Services (jel G2), Financing Policy; Capital and Ownership Structure (jel G32)
dx.doi.org/10.1093/rfs/hhs088, hdl.handle.net/1765/41198
The Review of Economic Studies
Erasmus School of Economics

Brown, S.J, Grundy, B.D, Lewis, C.M, & Verwijmeren, P. (2012). Convertibles and Hedge Funds as Distributors of Equity Exposure . The Review of Economic Studies, 25(10), 3077–3112. doi:10.1093/rfs/hhs088