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Journal of Financial Economics Vol. 91 No. 2 2008

Convertible bond arbitrage, liquidity externalities, and stock prices☆

Darwin Choi1,2; M GETMANSKY; H TOOKES1

1 Yale University · 2 Chinese University of Hong Kong

open access

Abstract

In the context of convertible bond issuance, we examine the impact of arbitrage activity on underlying equity markets. In particular, we use changes in equity short interest following convertible bond issuance to identify convertible bond arbitrage activity and analyze its impact on stock market liquidity and prices for the period 1993 to 2006. There is considerable evidence of arbitrage-induced short selling resulting from issuance. Moreover, we find strong evidence that this activity is systematically related to liquidity improvements in the stock. These results are robust to controlling for the potential endogeneity of arbitrage activity.

DOI
10.1016/j.jfineco.2008.02.008
Volume
91
Issue
2
Pages
227-251
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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