Why Do Convertible Issuers Simultaneously Repurchase Stock

Journal of Financial Economics 100 (2011) 113129
Contents lists available at ScienceDirect
Journal of Financial Economics

journal homepage: www.elsevier.com/locate/jfec
Why do convertible issuers simultaneously repurchase stock? An arbitrage-based explanation$

Abe de Jong a,b,n, Marie Dutordoir c, Patrick Verwijmeren d
a
Rotterdam School of Management, Erasmus University, the Netherlands University of Groningen, the Netherlands Manchester Business School, UK d University of Melbourne, Australia
b c
a r t i c l e in f o
Article history: Received 15 December 2008 Received in revised form 22 January 2010 Accepted 17 February 2010 Available online 27 October 2010 JEL classication: G32 Keywords: Convertible debt Convertible arbitrage Short selling Stock repurchase
abstract
Over recent years, a substantial fraction of US convertible bond issues have been combined with a stock repurchase. This paper explores the motivations for these combined transactions. We argue that convertible debt issuers repurchase their stock to facilitate arbitrage-related short selling. In line with this prediction, we show that convertibles combined with a stock repurchase are associated with lower offering discounts, lower stock price pressure, higher expected hedging demand, and lower issuedate short selling than uncombined issues. We also nd that convertible arbitrage strategies explain both the size and the speed of execution of the stock repurchases. & 2010 Elsevier B.V. All rights reserved.
1. Introduction
We thank an anonymous referee, Geert Bekaert, Ekkehart Boehmer, Arturo Bris, Hans Dewachter, Nico Dewaelheyns, Amy Dittmar, Eric Duca, Rudi Fahlenbrach, Mila Getmansky, Bruce Grundy, Andrew Karolyi, Craig Lewis, Igor Loncarski, Hanno Lustig, Sophie Manigart, Maria-Teresa n, Len Marchica, Ronald Masulis, Ser-Huang Poon, Miguel Rosello Rosenthal, Anil Shivdasani, Norman Strong, Marta Szymanowska, Randall Thomas, Linda van de Gucht, Mathijs van Dijk, Chris Veld, Kathleen Weiss Hanley, and seminar participants at Universitat Autonoma de Barcelona, Catholic University of Louvain, Maastricht University, Manchester University, University of Melbourne, Rotterdam School of Management, Erasmus University, University of Stirling, University of Warwick, the 2007 Australasian Finance and Banking Conference, the 2008 Financial Management Association Conference, and the 2009 European Finance Association Conference for their useful comments. Part of this article was written while Patrick Verwijmeren was visiting Owen Graduate School, Vanderbilt University. n Corresponding author at: Rotterdam School of Management, Erasmus University, the Netherlands. E-mail addresses: ajong@rsm.nl (A. de Jong), marie.dutordoir@mbs.ac.uk (M. Dutordoir), patrickv@unimelb.edu.au (P. Verwijmeren). 0304-405X/$ - see front matter & 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.jneco.2010.10.016
$
Convertible bond issuance by US corporations has increased dramatically from $15.1 billion in 1993 to $61.6 billion in 2007. Over recent years, a substantial percentage of US convertible debt issuers have announced a stock repurchase simultaneously with their convertible offering. Over the period 2005 to 2007, 23.7% of convertible issues were combined with a stock repurchase. On average, the stock buybacks account for 41.1% of the proceeds of the convertible bond issue. The combinations of convertible debt offerings with stock repurchases (combined offerings) are intriguing. Why would a rm, on the one hand, issue an equity-linked security and, on the other hand, reduce its equity base by repurchasing shares? Our goal in this paper is to obtain more insight into what motivates rms to combine convertible debt offerings with stock repurchases. Based on informal talks with investment
114
A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129
bankers and chief nancial ofcers of companies that executed a combined offering, we hypothesize that the recent surge in combined convertible debt offerings and stock repurchases can be explained by the inuence of convertible debt arbitrageurs. To exploit underpriced convertible issues, these funds buy the convertibles and short the underlying common stock. The resulting open-market short selling creates downward pressure on the stock price of the convertible debt issuer (Arshanapalli, Fabozzi, Switzer, and Gosselin, 2005; Loncarski, ter Horst, and Veld, 2009). We hypothesize that the combinations of convertible debt offerings with stock repurchases result from an interplay between the issuing rm and the arbitrageur. In a rst step, the issuer sells the convertible to a convertible debt arbitrageur via an underwriter. Subsequently, the arbitrageur borrows issuer shares and sells them to the underwriter at a pre-agreed price. The underwriter then sells the shares back to the issuing rm, thereby completing the stock repurchase. The arbitrageur benets from this transaction because he does not have to short stock at an uncertain price in a market that is crowded by other short sellers. The issuer benets from the combination because, in return for acting as a counterparty in the short-selling transaction of the arbitrageur, he can charge a higher price for the convertible offering. Moreover, by privately crossing the arbitrageurs trades, the issuer avoids concentrated open-market short sales and their negative stock price effect. Given its associated benets for both issuers and buyers, investment bankers refer to the combination of a convertible issue and a stock repurchase as a Happy Meal. In the academic literature, this popular transaction has thus far been ignored, however. We use a sample of uncombined convertible offerings, uncombined stock repurchases, and combined convertible debt-stock repurchase offerings made by US rms between 2003 and 2007 and obtain the following six pieces of empirical evidence consistent with the arbitrage explanation for combined offerings. First, combined offerings are approximately 20% less underpriced upon issuance than otherwise similar uncombined convertible offerings. This result is consistent with the notion that rms are able to negotiate more benecial offering terms in exchange for facilitating arbitrageurs in setting up their short positions. Second, issue-date abnormal stock returns for uncombined offerings are signicantly negative, while issue-date abnormal stock returns for combined offerings are close to zero. This pattern is consistent with lower issue-date price pressure associated with combined convertible offerings. Third, the expected hedging demand from convertible arbitrageurs is signicantly higher for combined convertible issues than for uncombined issues. Fourth, observed issue-date open-market short sales are signicantly lower for combined offerings. This nding is in line with the prediction that the short positions associated with combined convertibles are established in a privately negotiated transaction. Fifth, the number of shares that the convertible issuers announce to repurchase is highly correlated with the number of shares expected to be shorted by arbitrageurs. Sixth, the typical rm engaged in a combined offering repurchases 86.6% of the announced number of
shares in the rst quarter after the announcement, whereas for uncombined stock repurchases this percentage is much lower (2.6%). The immediate execution of stock repurchases is consistent with arbitrageurs setting up their positions. We also examine potential alternative explanations for combined offerings. We analyse whether rms engage in combined offerings to signal their true value to the market, to reduce earnings per share dilution, to optimize capital structure, or to nance a stock repurchase program. Collectively, our results indicate that combinations are primarily motivated by the issuers wish to cater to the hedging needs of convertible bond arbitrageurs. Our main contributions to the literature are the following. First, our ndings add new insights into the impact of arbitrage-driven short selling on corporate actions. Prior studies have focused on the impact of arbitrage-driven short selling on stock prices (Mitchell, Pulvino, and Stafford, 2004; Arshanapalli, Fabozzi, Switzer, and Gosselin, 2005) and on its implications for liquidity and market efciency (Agarwal, Fung, Loon, and Naik, 2007; Choi, Getmansky, and Tookes, 2009).1 Lamont (2004) documents various mechanisms used by rms to reduce short-selling activity, e.g., stock splits, lawsuits, or letters encouraging stockholders not to lend out their shares. We show that, instead of remaining passive or trying to impede short selling, rms can also adjust their corporate nance actions to cater to the specic needs of arbitrageurs. Second, our paper provides new insights into the stockholder wealth effects of convertible debt offerings. It is well documented that announcements of convertible bond offerings induce a signicant negative average stock price reaction. While studies published in the 1980s and 1990s register convertible debt announcement effects in the order of 2% (see Eckbo, Masulis, and Norli, 2007, for a review of the literature), Marquardt and Wiedman (2005) nd that recent convertible debt announcements are accompanied by stock returns that are more than twice as negative. Our results suggest that a substantial part of the announcement-date stock price effects associated with recent convertible debt issues can be attributed to hedginginduced price pressure. In line with the arbitrage explanation, we nd that, for uncombined convertible bond offerings, a signicant stock price reversal occurs over the weeks following the offering. For combined convertible bond issues, we nd no negative stock price reaction and no stock price drift over subsequent weeks. Also consistent with the arbitrage explanation, we nd that the difference in stock price reactions to combined and uncombined offerings is no longer signicant after controlling for differences in hedging-induced price pressure. Our ndings highlight the need to control for downward price pressure resulting from uninformed arbitrage-related short selling in an analysis of the wealth effects associated with recent convertible bond offerings. If not, estimates of the
1 Next to the relatively limited number of papers on arbitrageinduced short selling, a broad stream of literature also exists on short selling by fundamental traders (see, e.g., Diamond and Verrecchia, 1987; Senchack and Starks, 1993; Aitken, Frino, McCorry, and Swan, 1998; Cohen, Diether, and Malloy, 2007; and Diether, Lee, and Werner, 2009).
115
information content of convertible debt offerings are likely to suffer from a downward bias. Third, our paper adds to a number of recent studies that examine innovations in the design of convertible bond offerings. Hillion and Vermaelen (2004) describe the use of oating conversion prices, Korkeamaki (2005) analyzes the inclusion of soft and hard call features, Marquardt and Wiedman (2005) examine the use of a contingent conversion feature, and Lewis and Verwijmeren (2009) study cash settlement features.2 The combinations of convertible debt issues and stock repurchases are yet another illustration of the creativity with which convertible debt issuers deal with their changing environment, notably with the widespread presence of convertible debt arbitrageurs over recent years. Fourth, we contribute to the literature on stock repurchases. Traditional motivations for stock repurchases include signaling (Bhattacharya, 1979; Vermaelen, 1984; Louis and White, 2007), free cash ow reduction (Jensen, 1986), capital structure optimization (Dittmar, 2000), and takeover deterrence (Billett and Xue, 2007). Our results suggest another important motivation for repurchasing stock, namely the provision of a short position to arbitrageurs. The remainder of this paper is organized as follows. Section 2 discusses the arbitrage explanation together with the related literature and constructs our testable predictions. Section 3 describes the data set. Section 4 presents our empirical tests related to the arbitrage explanation, and Section 5 investigates alternative explanations. Section 6 concludes. 2. Theoretical background This section provides the theoretical background for our analysis and derives testable predictions. 2.1. The arbitrage explanation for combined offerings Prior literature provides several rationales for issuing convertible debt. These include mitigating asset substitution problems (Green, 1984), resolving the disagreement between managers and bondholders regarding the risk of a rms activities (Brennan and Kraus, 1987; Brennan and Schwartz, 1988), providing backdoor-equity nancing when conventional equity issuance is difcult due to asymmetric information (Stein, 1992), and reducing the issuance costs of sequential nancing while at the same time mitigating overinvestment (Mayers, 1998). Together, these rationales imply that convertibles are a suitable nancing tool for rms with high costs of attracting standard nancing instruments. Empirical studies nd that convertible debt issuers tend to be small, high-growth, unrated companies with high debt- and equity-related nancing costs (Kang and Lee, 1996; Lewis, Rogalski, and Seward, 1999, 2003). Our key research question is: Why, over recent years, have many convertible debt issuers combined their offering with a stock repurchase? Based on exploratory talks
2 Investment Dealers Digest (2006) states that convertibles are reinvented more times than Madonna.
with advisers and CFOs of companies that engaged in combinations, we argue that the explanation for these combinations can be found on the buyers side of the convertible debt market, notably in the widespread presence of convertible debt arbitrageurs over recent years. While convertible arbitrageurs have been active since the early 1990s, Choi, Getmansky, and Tookes (2009) report a sharp increase in their importance since the beginning of the 21st century. Choi, Getmansky, Henderson, and Tookes (2010) show that aggregate convertible debt issuance volumes measured over the period 1995 to 2006 increase following positive shocks in the funds available to convertible debt arbitrageurs. Brown, Grundy, Lewis, and Verwijmeren (2010) show that convertible arbitrage funds purchase 73.4% of the primary issues of convertible debt during the period 20002008. Convertible arbitrage opportunities arise either when convertibles are underpriced or when arbitrageurs can exploit superior technology in managing convertible risk (Agarwal, Fung, Loon, and Naik, 2007). Potential reasons for convertible debt underpricing include illiquidity and complexities associated with the valuation of hybrid securities (Lhabitant, 2002).3 Because convertibles embed a call option on the underlying stock, convertible debt arbitrageurs generally buy the (underpriced) convertibles and short the common stock of the issuing rm to hedge their positions. Brent, Morse, and Stice (1990) and Ackert and Athanassakos (2005) show that convertible debt issuers report substantially higher monthly short equity positions than other companies. We argue that the combined transactions result from the convertible debt issuers anticipation of this scenario. That is, the issuer is aware of the arbitrageurs need to short sell shares and, therefore, sets up the following mechanism. In a rst step, the issuer sells the bond to an underwriter in a private Rule 144A offering.4 The underwriter subsequently resells the 144A security for a spread to qualied institutional buyers (QIBs). In a second step, these QIBs (henceforth, arbitrageurs) hedge their position by borrowing shares of the issuer and selling them to the underwriter at a pre-agreed price. Fig. 1 summarises the combined package, which can be executed as rapidly as overnight. To the arbitrageur, the transaction offers the advantage that he instantaneously obtains a hedged position without having to engage in open-market short sales at uncertain prices. From the issuers viewpoint, the transaction has the advantage that he can negotiate a better price for the convertible offering in return for acting as a counterparty in the arbitrageurs short-selling transaction. The issuer also mitigates the negative issue-date price pressure caused by
3 It could be questioned why a rm would want to issue an undervalued security in the rst place. A potential explanation lies in the prole of the typical US convertible debt issuer described earlier, i.e., a rm that has difculties attracting standard (debt or equity) nancing instruments. 4 Combinations of security offerings and stock repurchases were prohibited under Rule 10b-6 of the Securities Act of 1934 (Lowenfels, 1973). Regulation M, which has replaced Rule 10b-6 since December 1996, allows the combination of convertible issues and stock repurchases for Rule 144A issues. Thus, by construction, all combined issues are privately placed Rule 144A offerings. The percentage of Rule 144A offerings among the uncombined issues is also very high (94.55%).
116
Step 1:
The convertible debt issuer sells a convertible debt offering, structured as a private Rule 144A offering, to an arbitrageur via an underwriter. Convertible Convertible Underwriter Arbitrageur
Issuer
Step 2:
Cash Cash The arbitrageur borrows a specific portion of the shares of the issuer and sells them to the underwriter at a pre-agreed price, thus obtaining a hedge against stock price movements. The underwriter then sells shares to the issuer, thereby completing the stock repurchase. Cash Cash Underwriter Stock Stock Arbitrageur
Issuer
Fig. 1. Mechanics of the Happy Meal transaction. This ow diagram provides an overview of the hypothesized steps in the package consisting of a convertible debt offering and a stock repurchase.
an increase in the supply of stock due to arbitrage-related short selling. The extent to which price pressure caused by the short-selling actions of convertible debt arbitrageurs is short-lived or (partly) permanent is an empirical question that we address further in this paper. Previous studies have found mixed evidence on the impact of various other uninformed demand or supply shocks on stock prices. Some authors report a complete price reversal within days after the shock, which is consistent with the notion that demand curves for stock are inelastic only in the short run (Harris and Gurel, 1986; Bechmann, 2004). Other authors nd that part of the price pressure effect is permanent (Dhillon and Johnson, 1991; Mazzeo and Moore, 1992; Lynch and Mendenhall, 1997), which is consistent with long-run downward-sloping demand curves (Shleifer, 1986). If convertible issuers attach a positive probability to a long-lived price drop caused by short selling, this could provide another motivation for them to add a stock repurchase to their convertible offering. 2.2. Testable predictions Convertible debt arbitrageurs are not required to report their transactions. Similar to other studies (Choi, Getmansky, and Tookes, 2009; Edwards and Weiss Hanley, 2009; Loncarski, ter Horst, and Veld, 2009), we thus have to rely on indirect evidence on arbitrageurs activities. From our main hypothesis regarding the motivation for combined offerings, we derive six empirically testable predictions. The rst four predictions pertain to differences between combined and uncombined convertibles. First, while convertibles are traditionally underpriced at issuance, offering discounts should be lower for combined convertibles than for uncombined convertibles, ceteris paribus. The underlying rationale is that issuers of combinations should be able to negotiate a higher convertible bond price in exchange for setting up the short position for the convertible bond buyers. Second, issue-date stock returns should be more negative for uncombined offerings than for combined offerings, due to lower levels of hedging-induced price pressure for the latter
offerings. Third, combined offerings should appeal most to rms with a high expected shorting demand from convertible debt arbitrageurs. For such offerings, arbitrageurs should be more eager to reach an agreement with the rm in return for not having to go to the open market to obtain their short positions. We thus predict a higher expected hedging demand for combined convertibles than for uncombined issues. Fourth, combined offerings should be associated with lower issue-date open-market short sales than uncombined convertibles. The reason is that, in combined offerings, the short position is established through a privately negotiated transaction and, as such, is not recorded in open-market short sales records. The last two predictions pertain to the stock repurchase accompanying the convertible offering. First, if the arbitrage explanation for combined offerings holds, then the number of shares that a convertible debt issuer announces to repurchase should closely match the number of shares expected to be shorted by arbitrageurs. Second, whereas normal stock repurchases often take a very long time to be executed (Stephens and Weisbach, 1998), combined convertible debt issuers should repurchase their stock almost immediately after the repurchase announcement, to allow convertible debt arbitrageurs to obtain their short positions. 3. Data We acquire information on convertible issues and share repurchases made by US rms over the period from 1997 to 2007. We start in 1997 because Regulation M, which made combined offerings legal, was introduced in December 1996. We obtain a sample of nonmandatory convertible debt offerings from the Securities Data Corporation (SDC) Global New Issues Database and a sample of stock repurchase announcements from SDCs Mergers and Acquisitions Database. We exclude stock repurchases that SDC classies as Dutch auctions or self-tender offers. We use Factiva to determine the announcement dates of the convertible debt offerings and the stock repurchases. We mark a convertible as a combined offering if the rm announces that it uses the
117
Table 1 Descriptive statistics for (combined) convertible issues and stock repurchases. This table presents summary statistics. Panel A reports the number of convertible issues, stock repurchases, and combined offerings of convertible issues and stock repurchases per year. N indicates the number of transactions. The column % combinations indicates the number of combined transactions as a percentage of the total number of convertible offerings. Panel B compares the proceeds of the convertible issue with the size of the announced stock repurchase. We also compare the announced size of the repurchase with rms market values, calculated by multiplying Compustat item #25 with #199 (both measured at the scal year-end prior to the issue date). In Panel C, we show the distribution of convertible issues over Fama-French 12-industry classications. The sample period in Panel A is 19972007, the sample period in Panels B and C is 20032007. Panel A: Intertemporal dispersion Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 N convertibles 237 145 108 153 207 117 256 181 105 142 162 N repurchases 1,286 1,934 1,515 806 659 469 470 563 638 586 972 N combinations 0 0 0 1 3 2 10 9 13 47 37 % combinations 0.0 0.0 0.0 0.7 1.4 1.7 3.9 5.0 12.4 33.1 22.8
Panel B: Value of the announced stock repurchases compared with the proceeds of the convertible issue and rms market values Mean Value repurchase/proceeds Value repurchase/market value 0.411 0.069 Median 0.348 0.053 Minimum 0.050 0.004 Maximum 1.111 0.489 Standard deviation 0.253 0.062
Panel C: Industry classication Fama-French 12 industry classication N Consumer nondurables Consumer durables Manufacturing Energy Chemicals Business equipment Telephone Utility Wholesale Health care Financial Other Total 1 2 4 0 0 32 3 1 14 20 22 17 116 Combined issues Percent 0.9 1.7 3.5 0.0 0.0 27.6 2.6 0.9 12.1 17.2 19.0 14.7 100.0 N 13 9 48 49 12 151 30 22 51 128 121 96 730 Uncombined issues Percent 1.8 1.2 6.6 6.7 1.6 20.7 4.1 3.0 7.0 17.5 16.6 13.2 100.0
proceeds to repurchase stock or if both transactions are announced separately on the same date. We also search the window [ 5, +5] relative to the convertible debt announcement date for stock repurchases, but this operation yields no additional observations.5 Panel A of Table 1 shows the number of convertible issues, stock repurchases, and combined offerings over the sample period. The number of convertible debt issues uctuates over time, whereas the number of stock repurchases has been fairly constant since 2000. Combined offerings are virtually
nonexistent prior to 2003 but make up a substantial fraction of convertible debt issuance from 2005 onward. In 2006, almost one-third of all US convertibles are combined with a stock repurchase. In 2007, the combinations remain very popular as well (22.8% of all convertible offerings).6 Given the very low number of combined offerings prior to 2003, we limit our research window to the period 2003 to 2007 in subsequent analyses. This operation results in a sample of 730 uncombined convertible offerings, 3,229 uncombined stock repurchases, and 116 combined offerings.
5 A substantial number of combined stock repurchases (77 out of 122) are not covered by SDC. The majority of the stock repurchases registered in SDC (29 out of 45) are marked as Privately Negotiated Offers, which is consistent with our main hypothesis that these repurchases are negotiated with convertible debt buying institutions.
6 We checked whether the exponential increase in combined offerings is driven by the presence of a few nancial advisers that push the combinations. We did not nd a signicant overrepresentation of any advisory rm in combined offerings, compared with the advisory rms involved in uncombined issues.
118
We gather the information necessary for constructing the explanatory variables for the empirical tests from the following sources. Deal-specic information is obtained from SDC and cross-checked by means of the offering prospectuses retrieved through the Edgar 10K Wizard. In case of disagreement between both sources, we take the value obtained from the offering prospectus. Company accounts variables are obtained from Compustat and measured at the scal year-end before the convertible debt issue date (in the variables description, # refers to a Compustat item number). Data related to stock prices (i.e., prices, volatility, trading volumes, and other liquidity measures) are retrieved from the Center for Research in Security Prices (CRSP). Trading days are measured relative to the convertible debt issuance date. We dene each explanatory variable only upon its rst occurrence in the paper. Panel B of Table 1 shows that the offering proceeds of convertible issues tend to be substantially larger than the funds used to repurchase shares. On average, the stock repurchase represents 41.1% of the convertible issue proceeds and 6.9% of the issuers equity market value (calculated as #199 multiplied by #25). There are only four rms for which the value of the announced repurchase exceeds the convertible issue proceeds. The minimum percentage of proceeds used to repurchase shares is 5.0%. Panel C of Table 1 provides Fama-French 12-industry classications for the two subsamples of convertible issuers. Most convertibles are issued by rms in the business equipment, nancial, and health care industry. Firms engaging in combined offerings are spread over ten of the 12 industries, although the wholesale, nancial, and health care industries are slightly overrepresented. 4. Empirical evidence related to the arbitrage explanation In this section, we test the six predictions derived from the arbitrage explanation for combinations of convertibles and stock repurchases. 4.1. Offering discounts The arbitrage explanation predicts that, after controlling for other potential determinants of underpricing, combined offerings should exhibit lower offering discounts than uncombined convertibles. The reason is that combined issuers should be able to obtain a stronger bargaining position (and hence, a better convertible price) by offering the short position to arbitrageurs. In line with Chan and Chen (2007), we dene the Offering Discount (OD) for a convertible debt offering as OD Theoretical Price-Offer Price=Theoretical Price 1
We obtain convertible debt offer prices from the Mergent Fixed Income Securities Database. In line with most other recent studies on convertible debt underpricing (Ammann, Kind, and Wilde, 2003; Chan and Chen, 2007; Loncarski, ter Horst, and Veld, 2009), we use the Tsiveriotis and Fernandes (1998) model to calculate the theoretical value of convertibles. According to Zabolotnyuk, Jones, and
Veld (2009), this convertible bond valuation model is very popular among practitioners. Tsiveriotis and Fernandes (1998) essentially use a binomial-tree approach to model the stock price process and decompose the total value of a convertible bond into an equity component and a straight debt component. We use the following input variables in the algorithm: risk-free interest rate (the yield on US Treasury bills with a maturity as close as possible to the maturity of the convertible bond, obtained from Datastream); stock price (measured ve trading days prior to the issue date to abstract from the price drop resulting from short-selling activity); stock return volatility; coupon rate and coupon payment frequency; issue, settlement, and maturity date; dividend yield; call schedule; and credit spread. The call schedule is obtained from Mergent, and all other security-related information is obtained from SDC (supplemented with information from the issue prospectuses). The credit spread is based on Standard and Poors (S&P) ratings for corporate industrial bonds with a maturity as close as possible to that of the convertible bond. We obtain the convertibles ratings from Mergent and the credit spreads from Datastream. A substantial part (68.76%) of our sample offerings does not have an S&P (or Moodys) rating at issuance. This observation can be explained by the fact that convertibles tend to be issued by small, unrated companies. In line with Loncarski, ter Horst, and Veld (2009), we assign a BBB rating to unrated bonds. The stock return volatility is dened as the annualized volatility estimated from daily stock returns over trading days 240 to 40 (as in Lewis, Rogalski, and Seward, 1999). In total, there are 361 convertibles for which we have sufcient information to calculate the offering discount. Our ndings with respect to convertible debt offering discounts are robust to the use of the following alternative volatility measures: historical volatility estimated from daily stock returns over trading days 520 to 1, as in Ammann, Kind, and Wilde (2003) (337 usable observations); historical volatility estimated from monthly stock returns over the ve years preceding the issue date, as in King (1986) (301 usable observations); GARCH(1,1) volatility predicted over the ve years post-issuance estimated with daily stock returns over trading days 1,300 to 40, as in Figlewski (1997) (273 usable observations); and implied volatility on the issuers nearest-the-money call option with the longest remaining maturity outstanding on the issue date, obtained from OptionMetrics (269 usable observations).7 Panel A of Table 2 provides the average and median offering discounts for combined and uncombined convertible offerings. The average (median) OD for the entire sample of convertibles (untabulated) is 17.06% (17.29%). This percentage is comparable to initial underpricing levels reported by other recent studies (e.g., Zabolotnyuk, Jones, and Veld, 2009). We nd that convertibles combined with a stock repurchase are, on average, 23.23% less underpriced than uncombined convertibles [(17.61 13.52)/17.61]. In median terms, the difference in ODs is even larger [(17.54 11.60)/17.54, or
7 Detailed offering discount estimates and test results obtained using these alternative volatility measures are available upon request.
119
Table 2 Difference in offering discounts between combined and uncombined issues. Panel A reports a univariate analysis of the Offering Discount (OD), calculated as (Theoretical Price Offer Price)/Theoretical Price for convertibles combined with a stock repurchase and single convertibles. The theoretical convertible debt price is obtained using the model of Tsiveriotis and Fernandes (1998). t-statistics and Wilcoxon test statistics are for the differences between combined and uncombined convertibles. Panel B reports a cross-sectional analysis of the determinants of OD. Combined Offering is equal to one for combined offerings and equal to zero otherwise. Delta is the convertibles sensitivity to small stock price changes calculated according to Eq. (2). Log(Assets) is the natural logarithm of Compustat item #6, measured at the scal year-end preceding the issue date. Proceeds/MV is offering proceeds divided by the market value of equity (measured as #25 multiplied by #199). Amihud is the Amihud (2002) measure for illiquidity (multiplied by 106). Volatility is the daily stock return volatility calculated from stock returns over trading days 240 to 40. We also include year dummy variables (not reported for space reasons). t-statistics (calculated with White heteroskedasticity-consistent standard errors) are in parentheses. The sample period is 2003 to 2007. *, **, and *** indicate signicance at the 10%, 5%, and 1% level, respectively. Panel A: Univariate analysis of offering discounts Combined Uncombined t-statistic (Wilcoxon test statistic) 2.21** ( 2.32**)
Average (median) OD Number
13.52% (11.60%) 49
17.61% (17.54%) 312
Panel B: Regression analysis of offering discounts OD Intercept Combined offering Delta Log(Assets) Proceeds/MV Amihud 106 Volatility Number R2 0.194 (3.62***) 0.039 ( 2.26**) 0.028 (0.95) 0.019 ( 3.11***) 0.097 (1.91*) 3.383 (4.38***) 1.426 (3.60***) 318 33.17%
N(.) is the cumulative probability under a standard normal distribution, S is the price of the underlying stock measured at day 5, X is the conversion price, r is the yield on a tenyear US Treasury bond (obtained from Datastream), and s is the annualized stock return volatility. T represents an estimate of the effective lifetime of the convertible as of its issuance date. The stated maturity of convertibles is likely to overstate T, because convertibles can be terminated prematurely for a number of reasons. Lewis, Rogalski, and Seward (1998) and Marquardt and Wiedman (2005) argue that the bulk of premature conversions of convertibles happen through conversion-forcing calls, which could take place as soon as the call protection period of the convertibles expires. For the callable convertibles in our data set, we therefore use the length of the call protection period as an estimate of their effective maturity.8 For noncallable convertibles (which constitute only 8.43% of the sample), we use the stated maturity. We also include year dummy variables (not reported for space reasons). The number of observations that can be included in the regression is 318. Panel B of Table 2 shows the regression results. Consistent with our prediction that combined issuers benet from the transactions by providing lower offering discounts, we observe a signicant negative coefcient for the Combined Offering dummy variable.9 The combined convertibles are still substantially underpriced at issuance, however (average OD of 13.52%), implying that arbitrageurs can still realize substantial prots from buying these instruments. As expected, ODs are signicantly positively inuenced by Proceeds/MV, Amihud, and Volatility and signicantly negatively inuenced by Log(Assets). 4.2. Abnormal stock returns at convertible debt issue dates To test whether combined offerings induce lower price pressure, we calculate cumulative abnormal stock returns (ARs) at the convertible debt issue date by means of standard event study methodology as described in Brown and Warner (1985). We use the period [ 200, 30] as the estimation window and the CRSP equally weighted market index as a market proxy. Panel A of Table 3 presents the event study results.
8 All callable convertibles have a call protection period of at least one year. The average call protection period length for these convertibles is 5.37 years, and their average stated maturity is substantially longer (16.71 years). Other factors (next to the presence of a call feature) that could inuence the lifetime of a convertible are the presence of a soft call feature (which is the case for 1.47% of the sample offerings), the presence of a put feature (which is the case for 58.68% of the sample offerings), delays in calling the bond, and (delays in) voluntary conversion of the bonds (Dunn and Eades, 1989). 9 To check whether the coefcient of the Combined Offering dummy variable could be affected by an endogeneity bias, we also estimate the regression using a two-step Heckman (1979) regression procedure. The rst step consists of estimating a probit regression with a dummy variable equal to one for combined offerings and equal to zero for uncombined offerings as a dependent variable, and with the same explanatory variables as those in Panel B of Table 2 on the right-hand side. In the second step, we estimate the same model as that represented in Panel B, except that we include the inverse Mills ratio obtained from the rst-step analysis as an additional explanatory variable. This operation does not materially change the coefcient of the Combined Offering dummy variable (coefcient is 0.038, signicant at less than 5%). The inverse Mills ratio is insignicant (z-value equals 1.41).
33.87%]. The difference in ODs between combined and uncombined offerings is signicant at the 5% level. The literature has shown that underpricing tends to be higher for more equity-like convertibles, for smaller rms, for larger offer sizes, for less liquid rms, and for rms with more volatile stock returns (Corwin, 2003; Cai, Helwege, and Warga, 2007; Loncarski, ter Horst, and Veld, 2009). To test whether the difference between combined and uncombined convertibles remains signicant after controlling for these determinants, we regress the ODs on a Combined Offering dummy variable equal to one for combined offerings as well as on Delta, Log(Assets) (#6), Proceeds/ MV (offering proceeds normalized by the market value of equity), the Amihud (2002) illiquidity measure (calculated using daily stock returns and trading volumes averaged over the window [ 120, 20]); and Volatility. We calculate the convertible debt delta as lnS=X r d s2 =2T p Delta edT Nd1 edT N , 2 s T where d is the continuously compounded dividend yield calculated as #21 divided by the market value of equity,
120
Table 3 Differences in issue-date stock returns between combined and uncombined issues. Panel A presents issue-date abnormal stock returns (ARs) for (un)combined convertible debt offerings. ARs are calculated using standard event study methodology (market model regressions). t-statistics and Wilcoxon test statistics are for the differences between combined and uncombined convertibles. The sample period in Panel A is 2003 to 2007. Panel B presents a regression analysis of issue-date ARs on a number of potential determinants. Combined Offering is a dummy variable equal to one for convertibles combined with a stock repurchase and equal to zero otherwise. All rm-specic variables are measured at the scal year-end preceding the issue date, unless noted otherwise. Delta is the convertibles sensitivity to small stock price changes calculated according to Eq. (2). Stock Run-up is the raw stock return measured over the window [ 76, 2]. Log(Assets) is the natural logarithm of the book value of total assets (Compustat item #6). Volatility is the daily stock return volatility calculated from stock returns over trading days 240 to 40. Leverage is the ratio of long-term debt (#9) to total assets. Market to Book is calculated as (#25 #199 #60 + #6)/#6). Short Sales is the sum of all open-market short sales for each rm on the issue date. SO are shares outstanding, measured as of trading day 20. Amihud is the Amihud (2002) measure for illiquidity (multiplied by 106). Analyst Dispersion is the standardized standard deviation of analysts forecasts for one-year-ahead EPS. t-statistics (calculated with White heteroskedasticity consistent standard errors) are in parentheses. The sample period in Panel B is January 2005 to July 2007. *, **, and *** indicate signicance at the 10%, 5%, and 1% level, respectively. Panel A: Issue-date ARs for combined and uncombined offerings Combined Average (median) AR Patell Z (rank test) statistic Number 0.32% (0.22%) 2.60*** (1.75**) 108 Uncombined 3.37% ( 2.74%) 32.29*** ( 11.55***) 633 t-stat. (Wilcoxon test stat.) 9.84*** (7.89***)
Panel B: Regression analysis of issue-date ARs Issue-date AR (1) Intercept Combined offering Delta Stock run-up Log(Assets) Volatility Leverage Market to book Short sales/SO Amihud 106 Analyst dispersion Analyst dispersion Short sales/SO Number R2 0.065 ( 1.84*) 0.024 (2.87***) 0.068 ( 2.36**) 3.922 (1.32) 0.008 (2.43**) 0.042 (0.05) 0.031 (1.77*) 0.011 (2.36**) (2) 0.008 (0.23) 0.012 (1.56) 0.046 ( 2.07**) 2.034 (1.07) 0.000 (0.01) 0.496 (0.81) 0.041 (2.17**) 0.006 (1.82*) 1.473 ( 3.11***) 663.96 ( 1.44) 0.000 ( 0.08) 0.086 ( 0.45) 100 40.24%
100 24.88%
We nd that the issue-date AR is signicantly negative ( 3.37% on average) for uncombined convertible issues. ARs for combined issues are signicantly positive (0.32% on average). The difference in issue-period returns between combined and uncombined issues is signicant at the 1% level. We thus obtain evidence consistent with our prediction that issuers of combined offerings are able to mitigate downward stock price pressure by reducing open-market short sales. One problem associated with the interpretation of the results in Panel A is that for 92.58% of the convertible debt offerings the announcement date falls in the window [ 1, 0] relative to the issue date. This observation can be explained by the very fast placement of recent convertible debt offerings (Mitchell, Pedersen, and Pulvino, 2007). As a result, the observed AR differences between combined and uncombined convertible offerings could also be caused by differences in the information content of both offerings. Following the logic of the Myers and Majluf (1984) model, announcing an equity-linked security offering could signal that the rm is overvalued. Convertible debt announcements should therefore have a negative impact on stock prices, which is conrmed by ndings of Davidson, Glascock, and Schwarz
(1995), Lewis, Rogalski, and Seward (2003), and Marquardt and Wiedman (2005). Repurchasing stock, in turn, generally results in a positive stock price reaction, because rms are more likely to buy back stock when they are undervalued (Asquith and Mullins, 1986; Comment and Jarrell, 1991; Ikenberry, Lakonishok, and Vermaelen, 1995). Thus, the observed differences in Panel A could also be caused by the fact that the addition of a stock repurchase mitigates the negative information content of the convertible offering. Constantinides and Grundy (1989) develop a model that explicitly predicts that rms issue a combination of a convertible and a stock repurchase for signaling purposes. To establish the extent to which the ndings in Panel A are attributable to differences in price pressure for combined and uncombined convertibles (as would be predicted by the arbitrage explanation) as opposed to differences in their information content (as would be predicted by a signaling scenario), we conduct a regression analysis with the issue-date AR as dependent variable. In a rst regression model, we include the Combined Offering dummy variable as well as a number of explanatory variables that are traditionally incorporated in cross-sectional regressions of convertible debt announcement effects, i.e., Delta, Stock Run-up [the stock
121
Table 4 Analysis of stock price reversals after convertible debt issues. This table reports (post-) issue-date cumulative average abnormal stock returns (CAARs) for three subsamples of convertible debt issues. The separatedate sample consists of uncombined convertibles for which the announcement date differs by more than one trading day from the issue date. The similardate sample incorporates all other uncombined convertibles. The sample period is 2003 to 2007. *, **, and *** indicate signicance at the 10%, 5%, and 1% level, respectively. Separate-date sample (1) CAAR [0,0] Patell Z Percent positive returns CAAR [ + 1, + 6] Patell Z Percent positive returns CAAR [ + 1, + 20] Patell Z Percent positive returns Number 1.40% 5.03*** 23.40 2.10% 2.51** 63.83 2.04% 2.10* 61.70 47 Similar-date sample (2) 3.53% 32.13*** 21.33 1.07% 3.08** 69.37 1.20% 1.27 67.08 586 Combined offerings (3) 0.32% 2.60*** 56.48 0.68% 0.86 53.70 0.22% 0.23 50.00 108
return over trading days 76 to 2], Log(Assets), Volatility, Leverage [the ratio of long-term debt (#9) to total assets], and Market to Book (market value minus book value of equity (#60) plus total assets, divided by total assets) (see, e.g., Lewis, Rogalski, and Seward, 2003; Dutordoir and Van de Gucht, 2007). We limit the regression to those 100 observations for which we have price pressure proxies available, because we include these proxies in the next step of the analysis. Results are presented in Column 1 of Panel B of Table 3. As expected, we nd a signicant positive regression parameter for the Combined Offering dummy variable. We also nd a signicant negative impact for Delta, which is consistent with the notion that more equity-like securities are perceived as a more negative signal about rm value (Myers and Majluf, 1984). Log(Assets), Leverage, and Market to Book have a signicantly positive inuence. In a second regression analysis presented in Column 2, we add explanatory variables measuring the magnitude of hedging-induced price pressure. We use the ratio of issue-date short sales to shares outstanding (Short Sales/ SO) as a proxy for the magnitude of the supply shock. We retrieve daily open-market short sales data from the NYSE Trade and Quote databases Regulation SHO (REG SHO) le, which covers short-selling transactions from January 2005 to July 2007. We measure shares outstanding on trading day 20. We also include the Amihud (2002) illiquidity measure, because price pressure effects should be stronger for more illiquid stocks (Bagwell, 1992). As argued by Baker, Coval, and Stein (2007), stocks with a larger dispersion in analyst opinions about their value are likely to have steeper demand curves, which should result in a larger price impact of a given supply shock. In line with these authors, we therefore control for the level of Analyst Dispersion (both separate and interacted with the Short Sales/SO ratio), measured as the standardized standard deviation of one-year analyst forecasts of earnings per shares (EPS) obtained from the Institutional Brokers Estimate System (I/B/E/S). After controlling for price pressure proxies, the Combined Offering dummy variable is no longer signicant. Its coefcient drops to half the size of the coefcient reported
in Column 1. This result suggests that the signicant differences in issue-date ARs for combined and uncombined offerings are largely attributable to hedging-related price pressure, as would be expected under an arbitrage scenario. As predicted, Short Sales/SO has a signicantly negative impact. The other price pressure-related variables have insignicant effects. Findings with respect to dealand rm-specic nancing costs proxies are similar to those in Column 1, except for the fact that the effect of Log(Assets) is now insignicant.10 To further disentangle the arbitrage explanation for combined offerings from a signaling interpretation, we examine cumulative average abnormal stock returns (CAARs) over the extended window [0, +20]. If demand curves for stock are not perfectly elastic, a large increase in the supply of stock due to arbitrage-related short selling is expected to cause a stock price decrease. Once the market has absorbed the excess supply, however, prices should reverse to their fundamental levels under the assumption that demand curves are inelastic only in the short run. The observation of a quick stock price reversal would thus be consistent with the arbitrage explanation, while the observation of a permanent price effect would be consistent with a signaling explanation or with the existence of long-run downward-sloping demand curves. We initially perform the price reversal analysis for the 47 uncombined convertibles for which the announcement happens more than one trading day prior to the issue date (labeled separate-date sample), because this subset is most likely to yield clean price pressure estimates. Table 4 presents the results. Consistent with the arbitrage explanation, we nd that the negative average issue-date effect of 1.40% quickly and fully
10 We check whether the change in impact of Log(Assets) could be driven by a multicollinearity problem by calculating condition numbers for the matrices of explanatory variables (see Marquardt and Wiedman, 2005, for a similar approach). Condition numbers between 30 and 100 indicate moderate to strong multicollinearity. The highest condition number for the regression in Column 2 is 34.96. Log(Assets) has, by far, the highest impact on multicollinearity levels. When Log(Assets) is omitted from the regression, the highest condition number drops to 20.86, with the main conclusions remaining unchanged.
122
reverses after the issuance (signicant positive CAAR of 2.10% over window [+1, +6]). CAARs over the window [+1, +20] are similar to those over the window [+1, +6]. The separate-date subsample also provides a good laboratory for obtaining clean estimates of convertible debt announcement effects. The average announcement-date AR for the 47 convertibles in this subsample (obtained through standard event study methodology) is 2.61% (untabulated). This estimate is very similar in size to the announcement effects registered by early studies on convertible bonds (see Eckbo, Masulis, and Norli, 2007, for a review of the literature). Remarkably, Marquardt and Wiedman (2005) report a much more negative stock price reaction of 5.50% for convertible debt offerings made over the period 2000 to 2002. Our results suggest that this more negative return could be explained by arbitrage-related short selling surrounding recent convertible debt offerings. Our ndings highlight the need to control for this price pressure effect when estimating the information content of convertible offerings. Mitchell, Pulvino, and Stafford (2004) obtain a similar conclusion with respect to the inuence of merger arbitrage on acquiring-rm stock price reactions. In Column 2, we report stock price reversal calculations for the 586 convertibles for which the announcement date falls in the window [ 1, 0] relative to the issue date (labeled similardate sample). Consistent with the arbitrage explanation, we again nd that the stock price changes direction immediately after the issue date. Over the window [+1, +6], we register a signicant positive stock return of 1.07%. This reversal effect might seem small relative to the average issue-date AR of 3.53%. However, as this issue-date return simultaneously incorporates the effect of the convertible debt announcement, the true percentage reversal of the price pressure effect is likely to be considerably larger.11 To conclude, we nd evidence of a (partial) reversal of the issue-date AR for uncombined convertibles, which suggests that (at least a component of) the issue-date effect is attributable to hedging-induced price pressure. To the extent that managers attach a positive probability to a long-lived drop in their rms stock price resulting from open-market short selling (due to long-run downward-sloping demand curves), this provides an additional motivation for them to combine their convertible offering with a stock repurchase. For completeness, Column 3 of Table 4 presents reversal calculations for convertibles combined with a stock repurchase. Consistent with the arbitrage explanation, we nd no evidence of signicant post-issuance stock price movements for these offerings.
for the stock. There are 149 observations for which we can obtain issue-date short sales information from NYSE TAQS REG SHO le, of which 42 are combinations.12 We then use the coefcients obtained from this regression to calculate the EHD for combined issuers had they opted for a noncombined offering instead. We include the following hedging demand determinants in our analysis.
Amihud: the Amihud (2002) measure for illiquidity.

According to Calamos (2003), it is easier for arbitrageurs to dynamically hedge more liquid stocks. Institutional Ownership: the number of shares held by 13F institutions (obtained from Thomson Reuters) divided by the number of shares outstanding (both measured at the scal year-end preceding the issue date). In line with Asquith, Pathak, and Ritter (2005), we use this variable as a proxy for the availability of shares to be borrowed. Dividend-Paying: a dummy variable equal to one if the rm has paid a dividend in the scal year preceding the convertible issue date (which can be established through #21) and equal to zero otherwise. Calamos (2003) argues that short sellers have a preference for stocks that pay no dividends, because the dividend represents a cash outow for them. Volatility: the annualized volatility estimated from daily stock returns over trading days 240 to 40. Convertible debt arbitrageurs can potentially realize higher trading prots on convertibles issued by more volatile rms due to the embedded option in the bond (Choi, Getmansky, and Tookes, 2009). Fundow: net inows in convertible arbitrage hedge funds (in millions of US dollars) measured over the three months preceding the issue month (obtained from the TASS Live and Graveyard hedge fund databases). Fundow serves as a proxy for intertemporal uctuations in the availability of funds for convertible debt arbitrage activities. Normal Short Sales/SO: average short sales over the window [ 10, 4], scaled by shares outstanding. In line with Christophe, Ferri, and Angel (2004), we use this variable to control for each rms typical ratio of shorted shares during the nonissuance period. We obtain similar ndings when we measure Normal Short Sales over alternative windows, e.g., [ 20, 2]. Delta: ceteris paribus, arbitrageurs have to short-sell more shares for convertibles with a higher delta, because these convertibles have a larger equity exposure. Moreover, as shown by Loncarski, ter Horst, and Veld (2009), relatively more equity-like convertibles are more likely to be underpriced at issuance.
4.3. Expected hedging demand To examine our prediction that combined issues should be associated with a higher expected hedging demand (EHD) from convertible arbitrageurs, we rst model issue-date short sales of the uncombined subsample (scaled by SO, as outlined earlier) as a function of potential determinants of convertible arbitrageurs shorting demand
11 Assuming a similar average price pressure effect as for the separate-date subsample (i.e., 1.40%), for example, we nd that 85.71% (1.20/1.40) of the issue-date effect has evaporated by day +20.
12 Our motivation for using issue-date short sales instead of changes in monthly short interest is that the former data provide a cleaner laboratory for testing our prediction. Monthly short interest data represent cumulative outstanding short positions at a given date during the month. This date overlaps with the convertible debt issuance date only by coincidence. Monthly short interest data are therefore more likely to be affected by short selling unrelated to the convertible debt offering. See also Mitchell, Pulvino, and Stafford (2004) and Choi, Getmansky, and Tookes (2009) for a description of the noise associated with monthly short interest data.
123
Table 5 Difference in expected hedging demand between combined and uncombined issues. Panel A presents a univariate analysis of the differences in potential hedging demand determinants for combined and uncombined convertible debt issues. Amihud is the Amihud (2002) measure for illiquidity. For expositional purposes, we multiply this measure by 1012 in the univariate analysis and by 106 in the regression analysis. Institutional Ownership is the number of shares held by 13F institutions at scal year-end preceding the issue date divided by the number of shares outstanding. Dividend-Paying is a dummy variable equal to one when the rm pays dividends over the year preceding the issue date (which can be established by looking at Compustat item #21). Volatility is the daily stock return volatility calculated from stock returns over trading days 240 to 40. Fundow equals net inows in convertible arbitrage hedge funds (in millions of US dollars) measured over the three months preceding the issue month. Normal Short Sales are average short sales over trading days 10 to 4. Delta is the convertibles sensitivity to small stock price changes calculated according to Eq. (2). Log(Proceeds) is the natural logarithm of the offering proceeds. R arb =SO is the number of shares that need to be repurchased to obtain a delta-neutral hedge as of the issuance date [calculated according to Eq. (3)], divided by the number of shares outstanding as of trading day 20. Panel B reports a cross-sectional regression analysis of the hedging demand for uncombined convertibles. Short Sales is the sum of all open-market short sales for each rm on the issue date, as reported in NYSE Trade and Quote databases Regulation SHO le. Panel C reports the results of a univariate comparison of Expected Hedging Demand (EHD) for combined and uncombined convertibles. EHD is the predicted value of the Short Sales/SO ratio obtained from the regressions in Panel B. In the univariate results, t-statistics and Wilcoxon test statistics are for the differences between combined and uncombined convertibles. In the regression results, t-statistics (calculated with White heteroskedasticity-consistent standard errors) are in parentheses. The sample period is January 2005 to July 2007. *, **, and *** indicate signicance at the 10%, 5%, and 1% level, respectively. Panel A: Univariate analysis of potential hedging demand determinants Average (median) Combined Amihud 1012 Institutional Ownership Dividend-Paying Volatility Fundow Normal Short Sales/SO Delta Log(Proceeds) R arb =SO 9.21 (6.48) 83.10% (86.83%) 45.24% (0.00%) 1.86% (1.57%) 249.42 (42.47) 0.21% (0.18%) 0.67 (0.71) 5.68 (5.52) 6.66% (5.87%) Uncombined 21.91 (8.90) 74.28% (78.31%) 63.55% (100.00%) 1.83% (1.64%) 54.86 (42.47) 0.20% (0.16%) 0.57 (0.63) 5.66 (5.56) 6.29% (4.57%) t-statistic (Wilcoxon statistic) 1.58 ( 0.96) 2.43** (2.29**) 2.02** ( 2.03**) 0.05 (0.05) 1.03 (1.25) 0.16 (0.65) 1.70* (1.35) 0.13 ( 0.27) 0.33 (1.50)
Panel B: Regression analysis of hedging demand for uncombined convertibles Short Sales/SO (1) Intercept Amihud 106 Institutional Ownership Dividend-Paying Volatility Fundow Normal Short Sales/SO Delta Log(Proceeds) R arb =SO
6 R arb =SO Amihud 10 Number R2 F-statistic
(2) 0.002 ( 0.16) 104.464 ( 0.95) 0.009 (2.32**) 0.000 (0.11) 0.159 ( 1.11) 0.000 (1.62) 0.023 (2.14**) 0.006 (1.75*) 0.001 ( 0.60) 0.087 (2.99***) 69.617 (0.19) 82 41.93% 4.48***
0.003 ( 0.33) 86.221 ( 1.49) 0.009 (2.45**) 0.000 (0.12) 0.161 ( 1.14) 0.000 (1.68*) 2.369 (2.17**) 0.006 (1.78*) 0.001 ( 0.59) 0.088 (3.24***) 82 41.91% 5.05***
Panel C: Analysis of expected hedging demand (EHD) Combined (1) (2) Average (median) EHD Number Average (median) EHD Number 1.55% (1.48%) 35 1.56% (1.47) 35 Uncombined 1.28% (1.10%) 82 1.28% (1.10%) 82 t-statistic (Wilcoxon test statistic) 2.05** (2.38**) 117 2.08** (2.24**) 117
Log(Proceeds):
the natural logarithm of the offering proceeds. Ceteris paribus, arbitrageurs have to short-sell more shares for larger convertible offerings. R arb =SO: the number of shares that needs to be shorted to obtain a delta-neutral hedge), which
can be determined by means of the formula (Calamos, 2003) R arb number of convertibles issued face value delta : conversion price 3
124
We scale R arb by shares outstanding. We expect this variable to have a positive impact on the issue-date hedging demand of arbitrageurs. Panel A of Table 5 provides a comparison of these potential hedging demand determinants for combined and uncombined convertibles. We nd that combined offerings have a signicantly higher percentage of institutional ownership (83.10% on average versus 74.28% on average) and a signicantly lower portion of dividendpaying rms (45.24% versus 63.55%). We also nd that combined convertible issues are more equity-like in nature than uncombined offerings (average Delta of 0.67 versus 0.57). Together, these ndings suggest that combined convertible debt issues are likely to attract higher hedging demand than uncombined convertible debt issues. The other variables do not signicantly differ between both subsamples.13 Column 1 in Panel B of Table 5 presents the results of a regression of the Short Sales/SO ratio of uncombined convertibles on its potential determinants. There are 82 uncombined convertibles for which we have sufcient information to estimate the regression model. All t-statistics are calculated with White heteroskedasticity-consistent standard errors. In line with our expectations, we nd that daily short sales are signicantly positively inuenced by Institutional Ownership, Fundow, Normal Short Sales/ SO, Delta, and the R arb =SO ratio. The regression has a high explanatory power (R2 of 41.91%, F-statistic signicant at the 1% level). In Column 2, we add an interaction term between the R arb =SO ratio and the Amihud illiquidity measure. We expect a negative impact for this variable, because it should be easier for arbitrageurs to reach their optimal hedging levels for relatively less illiquid shares. We nd no signicant impact for the interaction term, however. All other regression results remain similar. Subsequently, we use the coefcients of the regressions estimated for uncombined offerings to calculate the expected hedging demand (EHD) for combined convertible offerings. Using the regression specication in Column 1, we nd an average (median) EHD of 1.55% (1.48%) for combined issues, while the average EHD for uncombined issues is only 1.28% (1.10%). The difference between both ratios is statistically signicant at the 5% level, both according to a t-test and a Wilcoxon test. We obtain similar ndings when we use the regression specication in Column 2 to calculate the EHD. Overall, we can conclude that our results are consistent with the prediction that combined offerings are associated with higher expected shorting demand from arbitrageurs.14
4.4. Issue-date open-market short sales The arbitrage explanation predicts a higher expected hedging demand but lower observed issue-date openmarket short sales for combined offerings. Table 6 presents several issue-date short sales measures for combined and uncombined convertibles. Short Sales and SO are calculated as outlined earlier. D Short Sales is the difference between issue-date short sales and Normal Short Sales. TV is the average daily trading volume. In line with Choi, Getmansky, and Tookes (2009), we measure TV over the window [ 120, 20]. We nd that the average Short Sales/SO ratio for combined issues is 0.71%. For uncombined issues this ratio is almost twice as large (1.32%). The difference between combined and uncombined offerings is signicant at less than 1%. We obtain similar results when we use D Short Sales in the numerator and when we use TV in the denominator. The ndings in Table 6 are consistent with the notion that the short sales associated with combined issues happen largely outside of the open market, and are as such not recorded on open-market daily short sales tapes.
4.5. Number of shares announced to be repurchased If the arbitrage explanation holds, we expect to nd a close correspondence between the number of shares that should be repurchased to hedge the arbitrageurs position [labeled R arb , see Eq. (3)] and the number of shares the rm effectively announces to repurchase (labeled R). We assume that convertible arbitrageurs follow a so-called delta-neutral hedging technique that makes their positions invariant to small stock price movements.15 We calculate delta using the call protection length as a measure for the convertibles effective maturity. Because we are unsure about the maturity measure that is effectively used by arbitrageurs, we also calculate the delta using the stated maturity. Not surprisingly, this approach yields a much higher delta (0.87 on average, versus 0.60 on average when using the call protection length). For 77 of the rms engaging in a combined offering, we have sufcient information to calculate R arb . Using the delta measure based on the call protection length, we nd that the Pearson correlation coefcient between R arb and R is as high as 0.83. The ratio of R to R has an average value close arb to one (1.19). Using the delta measure based on the stated
(footnote continued) represented in Panel B, except that we include the inverse Mills ratio obtained from the rst-step analysis as an additional explanatory variable. This operation leaves the results virtually unaltered. The inverse Mills ratio is insignicant (z-value equals 0.44). 15 The comments accompanying the convertible bond issues retrieved from SDC contain several references to the use of the deltaneutral hedging technique, e.g.: Proceeds from the offering were used y to repurchase $150m of stock on the deal; y the delta hedge is a common application to mitigate the impact of short selling (convertible issue of Medimmune, June 24, 2006). Arguably, arbitrageurs could take other Greeks into account when deciding on their hedging positions. Still, most of the convertible arbitrage strategies build on the delta-neutral technique (Calamos, 2003).
13 It is remarkable that the offering proceeds of combined and uncombined convertible debt issues are not signicantly different. In other words, combined issuers do not seem to compensate for the repurchase by raising more convertible nancing. 14 To assess whether the results could be affected by an endogeneity bias caused by the fact that rms self-select into issuing combined convertibles, we also estimate the regression using a two-step Heckman (1979) procedure. The rst step consists of estimating a probit regression with a dummy variable equal to one for combined offerings and equal to zero for uncombined offerings as a dependent variable, and with the same explanatory variables as those in Panel B of Table 5 on the righthand side. In the second step, we estimate the same model as that
125
Table 6 Difference in observed daily short sales between combined and uncombined issues. This table presents a univariate analysis of the differences in observed daily short sales measures for combined and uncombined convertible debt issues. Short Sales is the sum of all open-market short sales for each rm on the issue date, as reported in NYSE Trade and Quote databases Regulation SHO le. SO is the number of shares outstanding measured at trading day 20 relative to the issue date. D Short Sales is the difference between Short Sales and Normal Short Sales, which are average daily short sales measured over trading days 10 to 4. TV is the average daily trading volume measured over trading days 120 to 20. t-statistics and Wilcoxon test statistics are for the differences between combined and uncombined convertibles. The sample period is January 2005 to July 2007. *, **, and *** indicate signicance at the 10%, 5%, and 1% level, respectively. Average (median) Combined Short Sales (N shares) Short Sales/SO D Short Sales/SO Short Sales/TV D Short Sales/TV Number 702,387 (395,350) 0.71% (0.48%) 0.51% (0.30%) 0.77 (0.54) 0.55 (0.33) 42 Uncombined 1,740,084 (699,050) 1.32% (1.11%) 1.12% (0.95%) 1.88 (1.51) 1.66 (1.29) 107 t-statistic (Wilcoxon statisitc) 2.62*** ( 3.60***) 2.98*** ( 3.46***) 3.24*** ( 3.53***) 4.25*** ( 3.28***) 4.46***( 3.45***)
Fig. 2. Percentages of actual repurchases in the rst quarter after the stock repurchase announcement. This gure shows the percentages of announced stock repurchases that are actually repurchased within the rst quarter after the announcement. The black bars represent stock repurchases announced in combination with convertible bond issues. The grey bars represent stock repurchases announced without a simultaneous convertible bond issue. The sample period is 20032007.
maturity, we also nd a close correspondence between R arb and R (correlation coefcient of 0.89, and an average R to 16 Rarb ratio of 0.86). These ndings are consistent with the notion that the stock repurchases are added to full the hedging needs of convertible bond arbitrageurs.
4.6. Speed with which common stock is repurchased An announcement of a stock repurchase does not precommit rms to acquire a specied number of shares. If convertible debt issuers buy back shares to help
16 Our ndings on the correspondence between R arb and R are robust to using the equity component size produced by the convertible bond valuation model of Tsiveriotis and Fernandes (1998) (estimated using the input parameters described in Section 4.1) and to using the probability of conversion of the convertible bonds (estimated following the simulation procedure outlined in Lewis and Verwijmeren, 2009) instead of the delta in Eq. (2). Our ndings are also robust to using a maturity estimate obtained from the Lewis and Verwijmeren (2009) simulation algorithm in the calculation of the delta.
arbitrageurs obtain their arbitrage positions, however, we expect the stock repurchases to be executed very quickly after their announcement. Stephens and Weisbach (1998) study a sample of 450 repurchase programs from 1981 to 1990. They nd that rms on average acquire only 6.3% of the number of stocks announced to be repurchased in the quarter of the repurchase announcement. Similar to these authors, we examine changes in shares outstanding obtained from CRSP. Among the combined issues, we have 72 observations with sufcient data to determine the changes in shares outstanding for the rst quarter. We also estimate the percentage of shares that is repurchased for normal (uncombined) stock repurchases over our research window. We have 2,281 stock repurchase observations with sufcient data. In line with Stephens and Weisbach, we reset observations in which the number of shares increases to zero, because we are only interested in decreases. Fig. 2 shows the actual shares repurchased in normal stock repurchases and in combined offerings during the rst quarter after the announcement date.
126
The white bars represent the percentage of stock repurchased in uncombined stock repurchases. More than 70% of the rms repurchase less than 20% of the announced number of shares in the rst quarter. To calculate the average percentage of shares repurchased, we reset observations in which the number of shares repurchased exceeds the announced number to 100%. For normal, uncombined stock repurchases, we nd that on average 18.8% of the announced shares are repurchased in the rst quarter (the median value equals 2.6%). The black bars represent the percentage of stock repurchased in combined offerings. A relatively large number of rms (42 or 58.3%) perform more than 80% of the announced stock repurchase in the rst quarter after the announcement. The average (median) percentage of shares repurchased in the rst quarter is 66.1% (86.6%). Due to potential simultaneous increases in shares outstanding (e.g., caused by stock option exercises), the real percentages that are repurchased are expected to be even higher. Apparently, rms in a combined offering repurchase shares much faster than in normal repurchases, which is consistent with arbitrageurs obtaining their positions. 5. Alternative explanations A number of other potential alternative explanations exists for the occurrence of combinations of convertible offerings and stock repurchases. In this section, we examine the validity of these explanations. 5.1. Signal rm value In Section 4.2, we disentangle the arbitrage explanation from a signaling interpretation by showing that the differences in stock price effects between combined and uncombined offerings are no longer signicant after controlling for differences in hedging-induced price pressure, and that negative stock price reactions for uncombined convertibles (partially) reverse post-issuance. In this subsection, we further assess the validity of the signaling explanation for combined offerings by comparing rm characteristics of combined issuers with those of uncombined issuers. If the signaling explanation for combinations holds, then we should observe that rms with stronger incentives for signaling are more likely to add a stock repurchase to their convertible offering. We include four proxies for a rms need for signaling in the analysis. The rst proxy is the Stock Run-up variable dened earlier. When a rm has a high stock price run-up prior to an equity(-linked) offering announcement, the market is more likely to think that the offering is inspired by rm overvaluation. For such companies, repurchasing stock might be a way to signal that their stock is in fact not overvalued. Three other proxy variables, PPE, Psi, and SDaccruals, relate to the level of information asymmetry regarding the rm. High information asymmetry increases the need to reveal the rms true value to the market. The variables are calculated as follows.
Psi: rm-specic return variability in a given year relative

to the total return variability, as in Durnev, Morck, Yeung, and Zarowin (2003). The underlying intuition is that a larger rm-specic variation in stock returns reects more information getting into the stock price, and thus less information asymmetry. The rm-specic stock return variation is obtained from the regression Firm returnt b0 b1 market returnt b2 industry returnt e, 4
which is estimated for each rm using monthly returns measured over the previous calendar year. Industry returns are based on two-digit standard industrial classication (SIC) codes. Market and industry returns are valueweighted averages excluding the rm for which the regression is estimated. The variance of e is scaled by the total variance of the dependent variables in the regression. SDaccruals: Lee and Masulis (2009) suggest that poor accounting quality, as proxied by a high standard deviation of estimation errors of accounting accruals, results in a high level of asymmetric information with regard to the rms value. We use the McNichols (2002) modication of the Dechow and Dichev (2002) model, which is CAt g0 g1 CFOt g2 CFOt 1 g3 CFOt1 g4 DSalest g5 PPEt n 5
In line with Lee and Masulis (2009), we calculate CA (current accruals) as D current assets (#4) minus D current liabilities (#5) minus D cash (#1) plus D debt in current liabilities (#34), with D representing changes from year t to year t 1. CFO is cash ows from operations, calculated as net income before extraordinary items (#18) minus total accruals, with total accruals equal to CA minus depreciation and amortization expenses (#14). Sales are dened as total revenue (#12). All variables are scaled by the average of total assets between year t 1 and year t. We take the standard deviation of the estimation error n, with a minimum number of observations of four consecutive years and a maximum of 15. We test the effects of these four proxy variables on the decision to combine a convertible debt offering with a stock repurchase by means of a probit analysis with the Combined Offering dummy variable as dependent variable. We also control for a number of other rm-specic characteristics that could affect the decision to add a stock repurchase, i.e., Log(Assets), Leverage, and Market to Book. We include year dummy variables to control for the increase in popularity of the combinations over the sample period (not reported for space reasons). The probit results presented in Column 1 of Table 7 show that the SDaccruals variable has a signicant negative impact on the decision to add a stock repurchase, which is exactly opposite to the prediction derived under the signaling interpretation. The other three signaling proxies have insignicant effects. With the exception of Market to Book, which is signicantly higher for combined offerings, the effects of the control variables are not signicant either. Together with the evidence presented in Table 5 on the differences in expected hedging demand between combined and
PPE: plant, property, and equipment (#7) divided by

total assets. Firms with a higher proportion of tangible assets are expected to have a lower level of asymmetric information regarding their value.
127
Table 7 Impact of rm characteristics on the decision to combine a convertible issue with a stock repurchase. This table presents the results of a probit model estimating the impact of rm characteristics on the decision to combine a convertible with a stock repurchase. The dependent variable is a dummy variable equal to one for convertibles combined with a stock repurchase and equal to zero otherwise. All rm-specic variables are measured at the scal year-end preceding the issue date, unless noted otherwise. Stock Run-up is the stock return measured over the window [ 76, 2]. PPE is the ratio of plant, property and equipment (Compustat item #7) to total assets (#6). Psi measures rm-specic return variability as in Durnev, Morck, Yeung, and Zarowin, 2003). SDaccruals measures the standard deviation of errors in estimations of accruals [accruals are estimated with Eq. (5)]. Log(Assets) is the natural logarithm of the book value of total assets. Leverage is the ratio of long-term debt (#9) to total assets. Market to Book is calculated as (#25 #199 #60 + #6)/#6). Decrease EPS is the change in diluted earnings per share that would occur without a stock repurchase. Bonus is the correlation between the change in annual chief executive ofcer cash bonus (reported in Execucomp) and the change in diluted EPS by two-digit standard industrial classication code for the year before the offering. Deviation from Target captures the difference between rms leverage and the industry median leverage, in which the industries are based on the Fama-French 12-industry classication. Marginal Tax Rate measures the marginal tax rate before interest expenses. This variable is downloaded from John Grahams website (www.duke.edu/ jgraham/). We also include year dummies (not reported for space reasons). z-statistics (calculated with Huber-White heteroskedasticity-consistent standard errors) are in parentheses. The sample period is 20032007. *, **, and *** indicate signicance at the 10%, 5%, and 1% level, respectively. Combined offering (1) Intercept Stock Run-up PPE Psi SDaccruals Log(Assets) Leverage Market to Book Decrease EPS Bonus Deviation from Target Marginal Tax Rate Number McFadden R2 2.439 ( 3.94***) 0.301 (1.13) 0.317 ( 0.74) 0.171 ( 0.48) 3.667 ( 2.70***) 0.008 ( 0.08) 0.256 (0.64) 0.206 (2.67***) (2) 2.438 ( 3.31***) 0.191 (0.69) 0.300 ( 0.62) 0.140 ( 0.36) 3.310 ( 2.29**) 0.031 ( 0.28) 0.405 (0.96) 0.223 (2.73***) 0.043 (0.02) 0.202 (0.40) (3) 1.954 ( 2.15**) 0.202 (0.58) 0.103 (0.18) 0.222 (0.44) 6.342 ( 1.92*) 0.040 (0.27) 0.286 (1.70*)
394 24.57%
344 24.50%
0.391 (0.68) 0.914 (0.77) 181 28.08%
uncombined offerings, the results in Table 7 suggest that combined and uncombined issuers differ in their attractiveness to arbitrageurs, not in their need for signaling. 5.2. Reduce EPS dilution Combining convertible issues and stock repurchases reduces the short-term EPS dilution caused by the convertible issue. Under the if-converted method, the denominator of diluted EPS needs to incorporate the shares that can be issued upon conversion of the convertible bonds, even though these convertibles are not (yet) converted into stock. When stock is repurchased, the number of outstanding shares decreases and EPS dilution is mitigated. To test the validity of the EPS dilution explanation, we augment the probit model reported in Column 1 of Table 7 with the following two variables.
Bonus: the correlation between the change in the

annual chief executive ofcer cash bonus (obtained from ExecuComp) and the change in diluted EPS by two-digit SIC code for the scal year before the offering (only if the number of observations for each industryyear is larger than ve). We expect that managers are more concerned with diluted EPS when their bonus plans relate to this measure, i.e., when Bonus is high. As can be seen in Column 2 of Table 7, the effects of Decrease EPS and Bonus are both insignicant. As an additional test for the validity of the EPS dilution explanation, we calculate the correspondence between the number of shares that managers would have to repurchase to completely neutralize the decrease in EPS due to the convertible offering (labeled R EPS ) and the number of shares they announce to repurchase (labeled R). Using the notation adopted earlier, we obtain the equation 1 Eadj =SHARESadj R EPS 0 or Eunadj =SHARESunadj Eadj Eunadj R : EPS SHARESadj SHARESunadj
Decrease EPS: the change in diluted earnings per share

that would occur without a stock repurchase. In line with Marquardt and Wiedman (2005), we calculate this variable as EPSPOST CB Decrease EPS 1 6 EPSPRECB with EPSPOST CB , earnings adjusted for the convertible offering (labeled Eadj) divided by SHARESadj, which is the sum of shares outstanding and the potentially dilutive shares resulting from the offering; and EPSPRECB , earnings unadjusted for the convertible offering (labeled Eunadj) divided by shares outstanding (SHARESunadj).
We nd that the average ratio of R to R EPS is 0.56. This value deviates much more strongly from one than the corresponding ratio calculated using R arb , which varied between 0.86 and 1.19. For 71 of the 77 observations for which we can calculate both R EPS and Rarb , we nd that the distance between Rarb and R is smaller than the distance between REPS and R. Together with the probit results in Table 7, this nding suggests that the
128
share repurchase decision is motivated by the presence of arbitrageurs, not by EPS dilution considerations. 5.3. Optimize capital structure The combined transactions could also be motivated by the issuers wish to move closer to their target debt ratios. If this explanation holds, then issuers of combinations should be more underlevered than other convertible issuers, as repurchasing stock increases the debt ratio (ceteris paribus). To examine whether combinations are driven by static tradeoff considerations, we extend the probit analysis reported in Column 1 of Table 7 (excluding Leverage) with the variable Deviation from Target, which measures the difference between the rms actual Leverage and the median industry leverage (industries are based on the Fama-French 12-industry classication). We also include the Marginal Tax Rate (before interest expenses) downloaded from John Grahams website (http://www.duke.edu/ jgraham). According to the static trade-off theory, rms with higher tax rates have a higher optimal debt ratio due to the tax deductibility of interest rates. We thus expect a negative impact of Deviation from Target and a positive impact of Marginal Tax Rate on the decision to add a stock repurchase. As can be seen in Column 3 of Table 7, these two additional variables have insignicant effects. Thus, the decision to combine a convertible debt offering with a stock repurchase does not seem to be driven by static trade-off considerations. 5.4. Finance a stock repurchase Throughout the paper, we have assumed that rms engaging in a combined offering add a stock repurchase to a convertible issue. However, the possibility exists that the initial decision is to repurchase stock and that the convertible issue is added simply to obtain funds for the repurchase. One argument against this reasoning is that, as shown in Table 1, the convertible issue tends to be about twice the size of the stock repurchase. Moreover, if the main motivation for the combined offerings is to obtain nancing to repurchase stock, we would predict that rms engaging in combined offerings have less nancial slack than normal (separate) stock repurchasers, which is not the case (t-statistic for difference in average Cash to Total Assets ratios equals 0.49). We also check whether rms engaging in a combined offering regularly announce stock repurchases and are therefore expected to do so again. We nd that, for the combined issuers, the number of stock repurchases announced over the ve years preceding the convertible debt announcement does not signicantly differ from the numbers announced by separate stock repurchasers or by uncombined convertible issuers.17 6. Conclusion We examine why convertible debt issuers add a stock repurchase to their offering. We argue that the stock
17 Detailed results regarding the comparisons between combined issues and uncombined stock repurchases can be obtained upon request.
repurchase serves to provide a short position to convertible debt arbitrageurs. In return for acting as counterparty in the short-selling transaction, the issuer can negotiate a lower offering discount. Moreover, he avoids negative price pressure around the convertible debt issuance date, which could be partly permanent. We present six pieces of empirical evidence consistent with the arbitrage explanation. First, combined offerings are offered at lower discounts than otherwise similar uncombined convertibles, suggesting that combined issuers benet from the transaction by obtaining a better price for their convertible. Second, issue-date stock returns are signicantly less negative for combined issues than for uncombined offerings. Consistent with the arbitrage explanation, a substantial part of the negative stock price reaction for uncombined offerings reverses in the weeks following the offering, while no signicant stock price drift exists for combined offerings. Third, combined offerings are issued by rms with high expected hedging demand from convertible bond arbitrageurs. Fourth, observed issue-date open-market short sales are signicantly lower for combined offerings. Fifth, the number of shares that a rm announces to repurchase correlates strongly with the expected short positions of convertible arbitrageurs. Sixth, the speed with which stock is repurchased is substantially higher in the combined transactions than in pure stock repurchases. References
Ackert, L., Athanassakos, G., 2005. The relationship between short interest and stock returns in the Canadian market. Journal of Banking and Finance 29, 17291749. Agarwal, V., Fung, W., Loon, Y., Naik, N., 2007. Liquidity provision in the convertible bond market: analysis of convertible arbitrage hedge funds. Unpublished working paper. Georgia State University, Atlanta, GA. Aitken, M., Frino, A., McCorry, M., Swan, P., 1998. Short sales are almost instantaneously bad news: evidence from the Australian Stock Exchange. Journal of Finance 53, 22052223. Amihud, Y., 2002. Illiquidity and stock returns: cross-section and timeseries effects. Journal of Financial Markets 5, 3156. Ammann, M., Kind, A., Wilde, C., 2003. Are convertible bonds underpriced? An analysis of the French market. Journal of Banking and Finance 27, 635653. Arshanapalli, B., Fabozzi, F., Switzer, L., Gosselin, G., 2005. New evidence on the market impact of convertible bond issues in the US. Finance Letters 3, 16. Asquith, P., Mullins, D., 1986. Signaling with dividends, stock repurchases, and equity issues. Financial Management 15, 2744. Asquith, P., Pathak, P., Ritter, J., 2005. Short interest, institutional ownership, and stock returns. Journal of Financial Economics 78, 243276. Bagwell, L., 1992. Dutch auction repurchases: an analysis of shareholder heterogeneity. Journal of Finance 47, 71105. Baker, M., Coval, J., Stein, J., 2007. Corporate nancing decisions when investors take the path of least resistance. Journal of Financial Economics 84, 266298. Bechmann, K., 2004. Short sales, price pressure, and the stock price response to convertible bond calls. Journal of Financial Markets 7, 427451. Bhattacharya, S., 1979. Imperfect information, dividend policy, and the bird in the hand fallacy. Bell Journal of Economics 10, 259270. Billett, M., Xue, H., 2007. The takeover deterrent effect of open market share repurchases. Journal of Finance 62, 18271850. Brennan, M., Kraus, A., 1987. Efcient nancing under asymmetric information. Journal of Finance 42, 12251243. Brennan, M., Schwartz, E., 1988. The case for convertibles. Journal of Applied Corporate Finance 1, 5564. Brent, A., Morse, D., Stice, E., 1990. Short interest: explanations and tests. Journal of Financial and Quantitative Analysis 25, 273289.
129
Brown, S., Grundy, B., Lewis, C., Verwijmeren, P., 2010. Convertibles and hedge funds as distributors of equity exposure. Unpublished working paper. New York University, University of Melbourne, and Vanderbilt University, New York, NY, Melbourne, Victoria, Australia, and Nashville, TN. Brown, S., Warner, J., 1985. Using daily stock returns: the case of event studies. Journal of Financial Economics 14, 331. Cai, N., Helwege, J., Warga, A., 2007. Underpricing in the corporate bond market. Review of Financial Studies 20, 20212046. Calamos, N., 2003. Convertible Arbitrage: Insights and Techniques for Successful Hedging. John Wiley and Sons, Hoboken, NJ. Chan, A., Chen, N., 2007. Convertible bond underpricing: renegotiable covenants, seasoning, and convergence. Management Science 53, 17931814. Choi, D., Getmansky, M., Henderson, B., Tookes, H., 2010. Convertible bond arbitrageurs as suppliers of capital. Review of Financial Studies 23, 24922522. Choi, D., Getmansky, M., Tookes, H., 2009. Convertible bond arbitrage, liquidity externalities, and stock prices. Journal of Financial Economics 91, 227251. Christophe, S., Ferri, M., Angel, J., 2004. Short selling prior to earnings announcements. Journal of Finance 59, 18451875. Cohen, L., Diether, K., Malloy, C., 2007. Supply and demand shifts in the shorting market. Journal of Finance 62, 20612096. Comment, R., Jarrell, G., 1991. The relative signaling power of Dutchauction and xed-price self-tender offers and open-market share repurchases. Journal of Finance 46, 12431271. Constantinides, G., Grundy, B., 1989. Optimal investment with stock repurchase and nancing as signals. Review of Financial Studies 2, 445465. Corwin, S., 2003. The determinants of underpricing for seasoned equity offerings. Journal of Finance 58, 22492279. Davidson, W., Glascock, J., Schwarz, T., 1995. Signaling with convertible debt. Journal of Financial and Quantitative Analysis 30, 425440. Dechow, P., Dichev, I., 2002. The quality of accruals and earnings: the role of accrual estimation errors. The Accounting Review 77, 3559. Dhillon, U., Johnson, H., 1991. Changes in the standard and poors 500 list. Journal of Business 64, 7585. Diamond, D., Verrecchia, R., 1987. Constraints on short-selling and asset price adjustment to private information. Journal of Financial Economics 18, 277311. Diether, K., Lee, K.-H., Werner, I., 2009. Short-sale strategies and return predictability. Review of Financial Studies 22, 575607. Dittmar, A., 2000. Why do rms repurchase stock? Journal of Business 73, 331355. Dunn, K., Eades, K., 1989. Voluntary conversion of convertible securities and the optimal call strategy. Journal of Financial Economics 23, 273301. Durnev, A., Morck, R., Yeung, B., Zarowin, P., 2003. Does greater rmspecic return variation mean more or less informed stock pricing? Journal of Accounting Research 41, 797836. Dutordoir, M., Van de Gucht, L., 2007. Are there windows of opportunity for convertible debt issuance? Evidence for Western Europe. Journal of Banking and Finance 31, 28282846. Eckbo, B., Masulis, R., Norli, O., 2007. Security offerings. In: Eckbo, B. (Ed.), Handbook of Corporate Finance: Empirical Corporate Finance. North Holland, Amsterdam, pp. 233373. Edwards, A., Weiss Hanley, K., 2009. Short selling in initial public offerings. Unpublished working paper. US Securities and Exchange Commission, Washington, DC. Figlewski, S., 1997. Forecasting volatility. Financial Markets Institutions and Instruments 6, 188. Green, R., 1984. Investment incentives, debt, and warrants. Journal of Financial Economics 13, 115136. Harris, L., Gurel, E., 1986. Price and volume effects associated with changes in the S&P 500: new evidence for the existence of price pressures. Journal of Finance 41, 815829. Heckman, J.J., 1979. Sample selection bias as a specication error. Econometrica 47, 153161. Hillion, P., Vermaelen, T., 2004. Death spiral convertibles. Journal of Financial Economics 71, 381415. Ikenberry, D., Lakonishok, J., Vermaelen, T., 1995. Market underreaction to open market share repurchases. Journal of Financial Economics 39, 181208.
Investment Dealers Digest, 2006. Share buybacks boost convertible market. C. OConnor, June 26, pp. 2223. Jensen, M., 1986. Agency costs of free cash ow, corporate nance, and takeovers. American Economic Review 76, 323329. Kang, J.K., Lee, Y., 1996. The pricing of convertible debt offerings. Journal of Financial Economics 41, 231248. King, R., 1986. Convertible bond valuation: an empirical test. Journal of Financial Research 9, 5369. Korkeamaki, T., 2005. Effects of law on corporate nancing practices: international evidence from convertible bond issues. Journal of Corporate Finance 11, 809831. Lamont, O., 2004. Go down ghting: short sellers vs. rms. Unpublished working paper. Yale School of Management, New Haven, CT. Lee, G., Masulis, R., 2009. Seasoned equity offerings: quality of accounting information and expected otation costs. Journal of Financial Economics 92, 443469. Lewis, C., Rogalski, R., Seward, J., 1998. Agency problems, information asymmetries, and convertible debt security design. Journal of Financial Intermediation 7, 3259. Lewis, C., Rogalski, R., Seward, J., 1999. Is convertible debt a substitute for straight debt or for common equity? Financial Management 28, 527. Lewis, C., Rogalski, R., Seward, J., 2003. Industry conditions, growth opportunities and market reactions to convertible debt nancing decisions. Journal of Banking and Finance 27, 153181. Lewis, C., Verwijmeren, P., 2009. Convertible security design and contract innovation. Unpublished working paper. Vanderbilt University and University of Melbourne, Nashville, TN, and Melbourne, Victoria, Australia. Lhabitant, F.-S., 2002. Hedge Funds: Myths and Limits. John Wiley and Sons, Chichester, West Sussex, UK. Loncarski, I., ter Horst, J., Veld, C., 2009. The rise and demise of the convertible arbitrage strategy. Financial Analysts Journal 65, 3550. Louis, H., White, H., 2007. Do managers intentionally use repurchase tender offers to signal private information? Evidence from rm nancial reporting behavior. Journal of Financial Economics 85, 205233. Lowenfels, L., 1973. SEC noaction letters: conicts with existing statutes, cases, and commission releases. Virginia Law Review 59, 303322. Lynch, A., Mendenhall, R., 1997. New evidence on stock price effects associated with changes in the S&P 500 index. Journal of Business 70, 351383. Marquardt, C., Wiedman, C., 2005. Earnings management through transaction structuring: contingent convertible debt and diluted EPS. Journal of Accounting Research 43, 205243. Mayers, D., 1998. Why rms issue convertible bonds: the matching of nancial and real investment options. Journal of Financial Economics 47, 83102. Mazzeo, M., Moore, W., 1992. Liquidity costs and stock price response to convertible security calls. Journal of Business 65, 353369. McNichols, M., 2002. The quality of accruals and earnings: the role of accrual estimation errors: discussion. The Accounting Review 77, 6169. Mitchell, M., Pedersen, L., Pulvino, T., 2007. Slow moving capital. American Economic Review 97, 215220. Mitchell, M., Pulvino, T., Stafford, E., 2004. Price pressure around mergers. Journal of Finance 59, 3163. Myers, S., Majluf, N., 1984. Corporate nancing and investment decisions when rms have information that investors do not have. Journal of Financial Economics 13, 187221. Senchack, A., Starks, L., 1993. Short-sale restrictions and market reaction to short-interest announcements. Journal of Financial and Quantitative Analysis 28, 177194. Shleifer, A., 1986. Do demand curves for stocks slope down? Journal of Finance 41, 579590. Stein, J., 1992. Convertible bonds as backdoor equity nancing. Journal of Financial Economics 32, 321. Stephens, C., Weisbach, M., 1998. Actual share reacquisitions in openmarket repurchase programs. Journal of Finance 53, 313333. Tsiveriotis, K., Fernandes, C., 1998. Valuing convertible bonds with credit risk. Journal of Fixed Income 8, 95102. Vermaelen, T., 1984. Repurchase tender offers, signaling and managerial incentives. Journal of Financial and Quantitative Analysis 19, 163181. Zabolotnyuk, Y., Jones, R., Veld, C., 2009. An empirical comparison of convertible bond valuation models. Unpublished working paper. Simon Fraser University, Canada.

Why Do Convertible Issuers Simultaneously Repurchase Stock

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Why Do Convertible Issuers Simultaneously Repurchase Stock

Uploaded by

Copyright:

Available Formats

Journal of Financial Economics 100 (2011) 113129

Contents lists available at ScienceDirect

Journal of Financial Economics

Why do convertible issuers simultaneously repurchase stock? An arbitrage-based explanation$

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

Average (median) OD Number

17.61% (17.54%) 312

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

 Amihud: the Amihud (2002) measure for illiquidity. 

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

 Psi: rm-specic return variability in a given year relative

 PPE: plant, property, and equipment (#7) divided by

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

0.391 (0.68) 0.914 (0.77) 181 28.08%

 Bonus: the correlation between the change in the

 Decrease EPS: the change in diluted earnings per share

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

A. de Jong et al. / Journal of Financial Economics 100 (2011) 113129

You might also like

Amihud: the Amihud (2002) measure for illiquidity.

Psi: rm-specic return variability in a given year relative

PPE: plant, property, and equipment (#7) divided by

Bonus: the correlation between the change in the

Decrease EPS: the change in diluted earnings per share