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

John S. Howe, Ji-Chai Lin and Ajai K. Singh

Financial Management, 1998, vol. 27, issue 4

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.

Date: 1998
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