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Clientele Effects and Cross-Security Market Making: Evidence from Calls of Convertible Preferred Securities

Author

Listed:
  • John S. Howe
  • Ji-Chai Lin
  • Ajai K. Singh

Abstract

We examine trading activity, bid-ask spreads, and potential arbitrage opportunities for market makers in the period around conversion-forcing calls of convertible preferred securities. We find an increased turnover in the called convertible preferred stock, which is consistent with a clientele effect. We also find a decrease in the average bid-ask spread of the called convertible preferred and the underlying common stock. This suggests increased liquidity in the post-announcement period. We argue that the liquidity improvement is a consequence of profitable cross-security trading opportunities.

Suggested Citation

  • John S. Howe & Ji-Chai Lin & Ajai K. Singh, 1998. "Clientele Effects and Cross-Security Market Making: Evidence from Calls of Convertible Preferred Securities," Financial Management, Financial Management Association, vol. 27(4), Winter.
    • Handle: RePEc:fma:fmanag:howe298
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    Cited by:

    1. Ammann, Manuel & Kind, Axel & Seiz, Ralf, 2010. "What drives the performance of convertible-bond funds?," Journal of Banking & Finance, Elsevier, vol. 34(11), pages 2600-2613, November.
    2. Bechmann, Ken L., 2004. "Short sales, price pressure, and the stock price response to convertible bond calls," Journal of Financial Markets, Elsevier, vol. 7(4), pages 427-451, October.
    3. J. Graham & J. Hughen, 2007. "Ownership structure, expectations, and short sales on the Nasdaq," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 31(1), pages 33-48, March.
    4. Omar, Ayishat & Tang, Alex P., 2019. "Earnings management and convertible preferred stock calls," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 423-433.
    5. repec:bla:finmgt:v:36:y:2007:i:2:p:1-21:1 is not listed on IDEAS

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