Why Do Convertible Issuers Simultaneously Repurchase Stock? An Arbitrage-Based Explanation

Abe de Jong, Marie Dutordoir, Patrick Verwijmeren
2007 Social Science Research Network  
In 2006, one-third of the U.S. convertible debt issuers simultaneously repurchased their own stock. This paper explores the motivations for these combined transactions. We argue that convertible debt issuers buy back their stock in order to facilitate short selling by convertible debt arbitrageurs, thereby mitigating the negative stock price reaction at the convertible debt issuance. In line with this prediction, we find that issue-date abnormal returns are significantly less negative for
more » ... ed offerings than for uncombined convertible issues. We also document that convertible arbitrage explains both the size and the timing of the stock repurchases. JEL classification: G32
doi:10.2139/ssrn.1008225 fatcat:xs6ydkxeebdlzjthodv77d535y