Why are Convertible Bond Announcements Associated with Increasingly Negative Abnormal Stock Returns? An Arbitrage-Based Explanation

56 Pages Posted: 24 Sep 2010 Last revised: 16 Feb 2012

See all articles by Eric Duca

Eric Duca

Colegio Universitario de Estudios Financieros (CUNEF)

Marie Dutordoir

University of Manchester - Manchester Business School

Chris Veld

Monash University

Patrick Verwijmeren

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

Date Written: September 13, 2010

Abstract

While convertible offerings announced between 1984 and 1999 induce average abnormal stock returns of −1.69%, convertible announcement effects over the period 2000 to 2008 are more than twice as negative (−4.59%). We hypothesize that this evolution is attributable to a shift in the convertible bond investor base from long-only investors towards convertible arbitrage funds. These funds buy convertibles and short the underlying stocks, causing downward price pressure. Consistent with this hypothesis, we find that the differences in announcement returns between the Traditional Investor period (1984-1999) and the Arbitrage period (2000-September 2008) disappear when controlling for arbitrage-induced short selling associated with a range of hedging strategies. Post-issuance stock returns are also in line with the arbitrage explanation. Average announcement effects of convertibles issued during the Global Financial Crisis are even more negative (−9.12%), due to a combination of short-selling price pressure and issuer, issue, and macroeconomic characteristics associated with these offerings.

Keywords: Convertible Debt Announcement Effect, Convertible Arbitrage, Short Selling, Hedge Funds

JEL Classification: G32, G39

Suggested Citation

Duca, Eric and Dutordoir, Marie and Veld, Chris and Verwijmeren, Patrick, Why are Convertible Bond Announcements Associated with Increasingly Negative Abnormal Stock Returns? An Arbitrage-Based Explanation (September 13, 2010). Available at SSRN: https://ssrn.com/abstract=1681392 or http://dx.doi.org/10.2139/ssrn.1681392

Eric Duca (Contact Author)

Colegio Universitario de Estudios Financieros (CUNEF) ( email )

Serrano Anguita 9
Madrid, Madrid 28004
Spain

Marie Dutordoir

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Chris Veld

Monash University ( email )

Building 11E
Clayton, Victoria 3800
Australia

Patrick Verwijmeren

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

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

Register to save articles to
your library

Register

Paper statistics

Downloads
289
Abstract Views
1,357
rank
106,783
PlumX Metrics