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Convertible Bond Arbitrageurs as Suppliers of Capital

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Author Info

  • Darwin Choi
  • Mila Getmansky
  • Brian Henderson
  • Heather Tookes
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    Abstract

    This article examines the potential impact of capital supply on security issuance. We focus on the role of convertible bond arbitrageurs as suppliers of capital to convertible bond issuers. We estimate a simultaneous equations model of demand and supply of convertible bond capital, linking the time series of aggregate convertible bond issuance to measures of capital supply: convertible bond arbitrage hedge fund flows, returns, and a proxy for arbitrageurs' use of leverage. We find that issuance is positively and significantly related to increases in all three supply measures. To provide further interpretation, we use the September/October 2008 short-selling ban as a natural experiment to examine the impact of an exogenous shock to the supply of capital from arbitrageurs. Results from both empirical approaches provide evidence that the supply of capital from convertible bond arbitrageurs impacts issuance. The Author 2010. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/rfs/hhq003
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    Bibliographic Info

    Article provided by Society for Financial Studies in its journal The Review of Financial Studies.

    Volume (Year): 23 (2010)
    Issue (Month): 6 (June)
    Pages: 2492-2522

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    Handle: RePEc:oup:rfinst:v:23:y:2010:i:6:p:2492-2522

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    Cited by:
    1. de Jong, Abe & Dutordoir, Marie & Verwijmeren, Patrick, 2011. "Why do convertible issuers simultaneously repurchase stock? An arbitrage-based explanation," Journal of Financial Economics, Elsevier, vol. 100(1), pages 113-129, April.
    2. Christian Dorion & Pascal Fran├žois & Gunnar Grass & Alexandre Jeanneret, 2014. "Convertible Debt and Shareholder Incentives," Cahiers de recherche 1403, CIRPEE.
    3. Agarwal, Vikas & Fung, William H. & Loon, Yee Cheng & Naik, Narayan Y., 2004. "Risk and return in convertible arbitrage: Evidence from the convertible bond market," CFR Working Papers 04-03, University of Cologne, Centre for Financial Research (CFR).
    4. Henderson, Brian J. & Zhao, Bo, 2014. "More than meets the eye: Convertible bond issuers' concurrent transactions," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 57-79.
    5. Bechmann, Ken L. & Lunde, Asger & Zebedee, Allan A., 2014. "In- and out-of-the-money convertible bond calls: Signaling or price pressure?," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 135-148.
    6. Heather Tookes & Brian Henderson, 2010. "Do Investment Banks' Relationships with Investors Impact Pricing? The Case of Convertible Bond Issues," Yale School of Management Working Papers amz2667, Yale School of Management.
    7. Dutordoir, Marie & Lewis, Craig & Seward, James & Veld, Chris, 2014. "What we do and do not know about convertible bond financing," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 3-20.
    8. Duca, Eric & Dutordoir, Marie & Veld, Chris & Verwijmeren, Patrick, 2012. "Why are convertible bond announcements associated with increasingly negative issuer stock returns? An arbitrage-based explanation," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 2884-2899.
    9. Dorion, Christian & Fran├žois, Pascal & Grass, Gunnar & Jeanneret, Alexandre, 2014. "Convertible debt and shareholder incentives," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 38-56.
    10. Lewis, Craig & Verwijmeren, Patrick, 2014. "Cash-settled convertible bonds and the value relevance of their accounting treatment," Journal of Corporate Finance, Elsevier, vol. 24(C), pages 101-111.
    11. Agarwal, Vikas & Fung, William H. & Loon, Yee Cheng & Naik, Narayan Y., 2011. "Risk and return in convertible arbitrage: Evidence from the convertible bond market," Journal of Empirical Finance, Elsevier, vol. 18(2), pages 175-194, March.

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