The Buyers’ Perspective on Security Design: Hedge Funds and Convertible Bond Call Provisions

48 Pages Posted: 26 Feb 2016 Last revised: 21 Jan 2017

See all articles by Bruce D. Grundy

Bruce D. Grundy

University of Melbourne

Patrick Verwijmeren

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

Date Written: January 20, 2017

Abstract

We provide evidence that security design reflects the interplay of capital supplier and security issuer preferences. While call provisions have historically been the default option in convertible security design, only a minority of post-2005 issues are callable. Because hedge funds dominate the market for new convertibles today and because convertible arbitrage is less risky without callability, the recent diminution in the frequency of call provisions in new convertible bond issues illustrates the importance of the preferences of the suppliers of capital in security design.

Keywords: Security design, supply of capital, call provisions, convertibles, hedge funds

JEL Classification: G2, G32

Suggested Citation

Grundy, Bruce D. and Verwijmeren, Patrick, The Buyers’ Perspective on Security Design: Hedge Funds and Convertible Bond Call Provisions (January 20, 2017). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2737700 or http://dx.doi.org/10.2139/ssrn.2737700

Bruce D. Grundy

University of Melbourne ( email )

Faculty of Economics & Commerce
Department of Finance
Victoria, 3010
Australia
+61 3 8344 9083 (Phone)
+61 3 8344 6914 (Fax)

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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