Why Do Convertible Issuers Simultaneously Repurchase Stock? An Arbitrage-Based Explanation

55 Pages Posted: 30 Oct 2007 Last revised: 9 Apr 2010

See all articles by Abe de Jong

Abe de Jong

Monash University; University of Groningen; European Corporate Governance Institute (ECGI)

Marie Dutordoir

The University of Manchester - Manchester Business School

Patrick Verwijmeren

Erasmus University Rotterdam (EUR)

Multiple version iconThere are 2 versions of this paper

Date Written: June 30, 2009

Abstract

Over recent years, a substantial fraction of U.S. 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 buy back their stock in order to facilitate short selling by convertible debt arbitrageurs. In line with this prediction, we find a higher expected hedging demand, lower offering discounts, and lower issue-date price pressure for convertibles combined with a stock repurchase than for uncombined convertible issues. We also show that convertible arbitrage explains both the size and the actual execution of the stock repurchases.

Keywords: Convertible debt, convertible arbitrage, short selling, stock repurchases

JEL Classification: G32

Suggested Citation

de Jong, Abe and Dutordoir, Marie and Verwijmeren, Patrick, Why Do Convertible Issuers Simultaneously Repurchase Stock? An Arbitrage-Based Explanation (June 30, 2009). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1025427

Abe De Jong

Monash University ( email )

900 Dandenong Rd
Room H3-56
Caulfield East, Victoria 3145
Australia

HOME PAGE: http://https://research.monash.edu/en/persons/abe-de-jong

University of Groningen ( email )

Postbus 72
9700 AB Groningen
Netherlands

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Marie Dutordoir

The University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Patrick Verwijmeren (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

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