Arbitrage vs. Informed Short Selling: Evidence From Convertible Bond Issuers

55 Pages Posted: 10 Mar 2018 Last revised: 24 Sep 2018

See all articles by John Hackney

John Hackney

University of South Carolina - Department of Finance

Tyler R. Henry

Miami University

Jennifer L. Koski

University of Washington - Michael G. Foster School of Business

Date Written: September 18, 2018

Abstract

Prior literature examines the effect of either informed or arbitrage short selling on equity markets. We test the relative importance of informed and uninformed short selling around convertible bond issues and earnings announcements for the same firms over the same time period. Convertible arbitrage short selling is associated with temporary price pressure, consistent with downward sloping demand curves. Earnings announcement short selling is consistent with informed traders who anticipate future returns. Firm-specific characteristics related to the cost of short selling similarly affect both informed and arbitrage short selling. Deal-specific characteristics capturing hedging demand also strongly determine convertible arbitrage short selling.

Keywords: Short Selling, Informed Trading, Arbitrage, Convertible Bonds, Earnings Announcements

JEL Classification: G12, G14, G32

Suggested Citation

Hackney, John and Henry, Tyler R. and Koski, Jennifer Lynch, Arbitrage vs. Informed Short Selling: Evidence From Convertible Bond Issuers (September 18, 2018). Available at SSRN: https://ssrn.com/abstract=3137226 or http://dx.doi.org/10.2139/ssrn.3137226

John Hackney

University of South Carolina - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

Tyler R. Henry

Miami University ( email )

Oxford, OH 45056
United States

Jennifer Lynch Koski (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-7975 (Phone)
206-685-9392 (Fax)

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