Catering Convertible Design to Hedge Fund Demand

47 Pages Posted: 27 Nov 2015

See all articles by Eric Duca

Eric Duca

Colegio Universitario de Estudios Financieros (CUNEF)

Marie Dutordoir

University of Manchester - Manchester Business School

Date Written: November 24, 2015

Abstract

The investor base in the primary convertible bond market experienced a major change towards the end of the 20th century, as convertible bond arbitrageurs entered a market that had been traditionally dominated by long-only investors. We document the impact of this shift in investor type on convertible bond issuer characteristics, design, and pricing. We find that firms taking advantage of the increased demand from convertible bond arbitrageurs were not only financially constrained issuers, but to a larger extent firms with debt capacity available. We also document that the ability of these arbitrageurs to diversify equity risk alters the relationship between convertible bond delta and underpricing. This change allows issuers to accommodate the preferences of hedge funds through a more equity-like bond design, while obtaining better pricing in the process.

Keywords: Capital Supply, Convertible Debt, Hedge Funds

Suggested Citation

Duca, Eric and Dutordoir, Marie, Catering Convertible Design to Hedge Fund Demand (November 24, 2015). Available at SSRN: https://ssrn.com/abstract=2695376 or http://dx.doi.org/10.2139/ssrn.2695376

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

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