Clientele Effects and Cross-Security Market Making: Evidence from Calls of Convertible Preferred Securities

Financial Management, Vol. 27, No. 4, Winter 1998

Posted: 19 Feb 1999

See all articles by John S. Howe

John S. Howe

University of Missouri at Columbia - Department of Finance

Ji-Chai Lin

Hong Kong PolyU

Ajai K. Singh

Department of Finance, University of Central Florida

Abstract

We examine trading activity, bid-ask spreads, and potential arbitrage opportunities for market makers in the period around conversion-forcing calls of convertible preferred securities. We find an increased turnover in the called convertible preferred stock, which is consistent with a clientele effect. We also find a decrease in the average bid-ask spread of the called convertible preferred and the underlying common stock. This suggests increased liquidity in the post-announcement period. We argue that the liquidity improvement is a consequence of profitable cross-security trading opportunities.

JEL Classification: G12, G14

Suggested Citation

Howe, John S. and Lin, Ji-Chai and Singh, Ajai K., Clientele Effects and Cross-Security Market Making: Evidence from Calls of Convertible Preferred Securities. Financial Management, Vol. 27, No. 4, Winter 1998, Available at SSRN: https://ssrn.com/abstract=144197

John S. Howe (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

224 Middlebush Hall
Columbia, MO 65211
United States
573-882-5357 (Phone)
573-884-6296 (Fax)

Ji-Chai Lin

Hong Kong PolyU ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon
China

Ajai K. Singh

Department of Finance, University of Central Florida ( email )

College of Business Administration
12744 Pegasus Drive
Orlando, FL 32816
United States
407-823-0761 (Phone)
407-823-6676 (Fax)

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