Why Do Convertible Issuers Simultaneously Repurchase Stock? An Arbitrage-Based Explanation
In 2006, one-third of the U.S. convertible debt issuers simultaneously repurchased their own stock. This paper explores the motivations for these combined transactions. The authors argue that convertible debt issuers buy back their stock in order to facilitate short selling by convertible debt arbitrageurs, thereby mitigating the negative stock price reaction at the convertible debt issuance date. In line with this prediction, they find lower issue-date open-market short selling and less negative issue-date abnormal stock returns for combined offerings than for uncombined convertible issues. They also show that convertible arbitrage explains both the size and the actual execution of the stock repurchases.