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

Author

Listed:
  • Marie Dutordoir

    (University Rotterdam of Management)

  • Patrick Verwijmeren

    (Erasmus University Rotterdam)

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.

Suggested Citation

  • Marie Dutordoir & Patrick Verwijmeren, 2008. "Why do Convertible Issuers simultaneously Repurchase Stock? An Arbitrage-based Explanation," Working Papers 0802, Departament Empresa, Universitat Autònoma de Barcelona, revised Feb 2008.
    • Handle: RePEc:bbe:wpaper:0802
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Convertible debt; convertible arbitrage; stock repurchases.;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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