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

Abe de Jong*, Marie Dutordoir, Patrick Verwijmeren

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

33 Citations (Scopus)

Abstract

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. (C) 2010 Elsevier B.V. All rights reserved.

Original languageEnglish
Pages (from-to)113-129
Number of pages17
JournalJournal of Financial Economics
Volume100
Issue number1
DOIs
Publication statusPublished - Apr-2011

Keywords

  • Convertible debt
  • Convertible arbitrage
  • Short selling
  • Stock repurchase
  • MARKET SHARE REPURCHASES
  • ACCRUAL ESTIMATION ERRORS
  • TENDER OFFERS
  • STANDARD-AND-POOR-500 LIST
  • FINANCING DECISIONS
  • PRIVATE INFORMATION
  • PRICE PRESSURE
  • DUTCH-AUCTION
  • SHORT SALES
  • DEBT

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