Convertible Arbitrage Price Pressure and Short-Sale Constraints

39 Pages Posted: 8 Mar 2012

See all articles by Abe de Jong

Abe de Jong

Rotterdam School of Management, Erasmus University; Monash University; European Corporate Governance Institute (ECGI)

Marie Dutordoir

University of Manchester - Manchester Business School

Nathalie van Genuchten

Rabobank International, Netherlands

Patrick Verwijmeren

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

Date Written: March 3, 2012

Abstract

Convertible arbitrageurs combine long positions in convertibles with short positions in the underlying stock. We exploit worldwide differences in short-sale constraints to examine whether convertible arbitrage short selling creates downward pressure on convertible issuers’ stock prices. Using a sample of 4,148 convertibles issued over the period 1990-2009 by firms listed in 35 different countries, we find that short-sale constraints have a positive effect on issue-date abnormal stock returns. The effect is stronger in years with higher hedge fund involvement, as well as for offerings expected to induce more arbitrage short selling. Our findings suggest that a substantial part of the stock price effect of convertible bond issues is attributable to convertible arbitrageurs.

Keywords: short selling, short-sale constraints, convertible bonds, convertible arbitrage, price pressure

JEL Classification: G2, G32, G38

Suggested Citation

de Jong, Abe and Dutordoir, Marie and van Genuchten, Nathalie and Verwijmeren, Patrick, Convertible Arbitrage Price Pressure and Short-Sale Constraints (March 3, 2012). Financial Analysts Journal, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2018084

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 )

900 Dandenong Rd
Room H3-56
Caulfield East, Victoria 3145
Australia

HOME PAGE: http://https://research.monash.edu/en/persons/abe-de-jong

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Marie Dutordoir

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Nathalie Van Genuchten

Rabobank International, Netherlands ( email )

Utrecht 3500 HG
Netherlands

Patrick Verwijmeren (Contact Author)

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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