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

de Jong, A., Dutordoir, M. and Verwijmeren, P. (2011) Why do convertible issuers simultaneously repurchase stock? An arbitrage-based explanation. Journal of Financial Economics, 100(1), pp. 113-129. (doi: 10.1016/j.jfineco.2010.10.016)

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Publisher's URL: http://dx.doi.org/10.1016/j.jfineco.2010.10.016


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.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Verwijmeren, Professor Patrick
Authors: de Jong, A., Dutordoir, M., and Verwijmeren, P.
College/School:College of Social Sciences > Adam Smith Business School > Accounting and Finance
Journal Name:Journal of Financial Economics
Published Online:27 October 2010

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