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Why do convertible issuers simultaneously repurchase stock? An arbitrage-based explanation

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  • Marie Dutordoir

    ()
    (Rotterdam School of Management, Erasmus University Rotterdam)

  • Patrick Verwijmeren

    ()
    (Faculty of Business and Economics, The University of Melbourne)

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    Abstract

    We examine why firms combine convertible debt offerings with stock repurchases. In 2006, 33% of the convertible issuers in the US simultaneously repurchased stock. These combined transactions are inconsistent with traditional motivations for convertible issuance. We document that convertible arbitrage drives these stock repurchases. Convertible debt arbitrageurs simultaneously buy convertibles and short sell the issuer’s common stock, resulting in downward pressure on the stock price. To prevent such short-selling activity, firms repurchase their stock directly from arbitrageurs. We show that combined transactions exhibit lower short-selling activity and that convertible arbitrage explains both the size and speed of the stock repurchases.

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    Bibliographic Info

    Paper provided by Department of Business Economics, Universitat Autonoma de Barcelona in its series Working Paper with number 200802.

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    Handle: RePEc:bbe:wpaper:200802

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    Keywords: Convertible debt; convertible arbitrage; stock repurchases;

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