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

  • de Jong, Abe
  • Dutordoir, Marie
  • Verwijmeren, Patrick
Registered author(s):

    Over recent years, a substantial fraction of US convertible bond issues have been combined with a stock repurchase. This paper explores the motivations for these combined transactions. We argue that convertible debt issuers repurchase their stock to facilitate arbitrage-related short selling. In line with this prediction, we show that convertibles combined with a stock repurchase are associated with lower offering discounts, lower stock price pressure, higher expected hedging demand, and lower issue-date short selling than uncombined issues. We also find that convertible arbitrage strategies explain both the size and the speed of execution of the stock repurchases.

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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 100 (2011)
    Issue (Month): 1 (April)
    Pages: 113-129

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    Handle: RePEc:eee:jfinec:v:100:y:2011:i:1:p:113-129
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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