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

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