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

56 Pages Posted: 15 Mar 2009 Last revised: 26 Jan 2012

See all articles by Abe de Jong

Abe de Jong

Rotterdam School of Management, Erasmus University; Monash University

Marie Dutordoir

University of Manchester - Manchester Business School

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

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 repurchase

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). Available at SSRN: https://ssrn.com/abstract=1359090 or http://dx.doi.org/10.2139/ssrn.1359090

Abe De Jong

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-25
Rotterdam, 3000 DR
Netherlands
+31 10 408 1022 (Phone)

HOME PAGE: http://https://www.rsm.nl/people/abe-de-jong/

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Marie Dutordoir (Contact Author)

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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