Why do Convertible Issuers simultaneously Repurchase Stock? An Arbitrage-based Explanation

Marie Dutordoir and Patrick Verwijmeren
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Marie Dutordoir: University Rotterdam of Management
Patrick Verwijmeren: Erasmus University Rotterdam

No 802, Working Papers from Departament Empresa, Universitat Autònoma de Barcelona

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.

Keywords: Convertible debt; convertible arbitrage; stock repurchases. (search for similar items in EconPapers)
JEL-codes: G32 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2008-02, Revised 2008-02
References: View references in EconPapers View complete reference list from CitEc
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Published in Working Papers at the Department of Business, February pages 1-54

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