Convertible Bond Arbitrageurs as Suppliers of Capital

Review of Financial Studies, forthcoming

54 Pages Posted: 11 Mar 2009 Last revised: 22 Feb 2010

See all articles by Darwin Choi

Darwin Choi

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Mila Getmansky Sherman

University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance

Brian J. Henderson

George Washington University - Department of Finance

Heather Tookes

Yale University - Yale School of Management; Yale University - International Center for Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 2009

Abstract

This paper examines the potential impact of capital supply on security issuance. We focus on the role of convertible bond arbitrageurs as suppliers of capital to issuers of convertible bonds. We estimate a simultaneous equations model of demand and supply of convertible bond capital, linking the time series of aggregate convertible bond issuance to measures of capital supply: convertible bond arbitrage hedge fund flows, returns, and a proxy for arbitrageurs' use of leverage. We find that issuance is positively and significantly related to increases in all three supply measures. To provide further interpretation, we conduct a second test. We use the ban on short selling in September and October 2008 as a natural experiment to examine the impact of an exogenous shock to the supply of capital from convertible bond arbitrageurs. We find a significant decline in issuance during the ban. Results from both empirical approaches provide evidence that the supply of capital from convertible bond arbitrageurs impacts issuance.

Keywords: capital structure, supply of capital, convertible bond arbitrage, hedge funds, short selling, crisis of 2008

JEL Classification: G32, G23

Suggested Citation

Choi, Darwin and Getmansky Sherman, Mila and Henderson, Brian Joseph and Tookes, Heather, Convertible Bond Arbitrageurs as Suppliers of Capital (December 2009). Review of Financial Studies, forthcoming. Available at SSRN: https://ssrn.com/abstract=1356328

Darwin Choi

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Mila Getmansky Sherman

University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance ( email )

Amherst, MA 01003-4910
United States

Brian Joseph Henderson

George Washington University - Department of Finance ( email )

Department of Finance, Funger Hall
2201 G Street, NW
Washington, DC 20052
United States
202-994-3669 (Phone)

Heather Tookes (Contact Author)

Yale University - Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Yale University - International Center for Finance ( email )

Box 208200
New Haven, CT 06520
United States

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