Convertible Bond Arbitrageurs as Suppliers of Capital

Darwin Choi; Mila Getmansky; Brian J. Henderson; Heather Tookes

doi:10.1093/rfs/hhq003

Convertible Bond Arbitrageurs as Suppliers of Capital

Darwin Choi¹; Mila Getmansky²; Brian J. Henderson³; Heather Tookes⁴

¹ Hong Kong University of Science and Technology · ² University of Massachusetts Amherst · ³ George Washington University · ⁴ Yale University

Review of Financial Studies 2010

This article examines the potential impact of capital supply on security issuance. We focus on the role of convertible bond arbitrageurs as suppliers of capital to convertible bond issuers. We estimate a simultaneous equations model of demand and supply of convertible bond capital, linking the time series of aggregate convertible bond issuance to measures of capital supply: convertible bond arbitrage hedge fund flows, returns, and a proxy for arbitrageurs’ use of leverage. We find that issuance is positively and significantly related to increases in all three supply measures. To provide further interpretation, we use the September/October 2008 short-selling ban as a natural experiment to examine the impact of an exogenous shock to the supply of capital from arbitrageurs. Results from both empirical approaches provide evidence that the supply of capital from convertible bond arbitrageurs impacts issuance.

DOI: 10.1093/rfs/hhq003
Volume: 23 (6)
Pages: 2492-2522
Language: en
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