More than Meets the Eye: Convertible Bond Issuers' Concurrent Transactions

47 Pages Posted: 5 Jun 2013 Last revised: 7 Sep 2013

See all articles by Brian J. Henderson

Brian J. Henderson

George Washington University - Department of Finance

Bo Zhao

George Washington University

Date Written: September 6, 2013

Abstract

In recent years, over 60% of convertible bond issuers conduct concurrent transactions including share repurchases, call option purchases, warrant sales, seasoned equity offerings, and stock lending program initiations. We investigate the determinants of issuers' choice of concurrent transactions and find that a proxy for capital supply (flows to convertible bond arbitrage hedge funds) is a significant determinant. Option purchases are more likely when capital supply is low and the convertible is dilutive to earnings. SEOs are more likely when firms have valuable growth opportunities and capital supply is low. Convertible issuers establish lending programs when arbitrageurs likely encounter difficulty shorting their stock, suggesting these firms facilitate short selling in their own stock. These results suggest that, in the convertible bond market, the influence of capital supply extends beyond the issuance decision to the use of concurrent transactions and that these transactions offer important flexibility to issuers. We find that average equity market announcement effects differ when issuers conduct concurrent transactions. Consistent with models of adverse selection, concurrent transactions that reduce the dilutive impact on earnings, thereby making the design more debt-like, are associated with less negative announcement effects. Conversely, concurrent transactions that increase the dilutive impact on earnings, thereby making the design more equity-like, are associated with more negative announcement effects.

Suggested Citation

Henderson, Brian Joseph and Zhao, Bo, More than Meets the Eye: Convertible Bond Issuers' Concurrent Transactions (September 6, 2013). Available at SSRN: https://ssrn.com/abstract=2274228 or http://dx.doi.org/10.2139/ssrn.2274228

Brian Joseph Henderson (Contact Author)

George Washington University - Department of Finance ( email )

Department of Finance, Funger Hall
2201 G Street, NW
Washington, DC 20052
United States
202-994-3669 (Phone)

Bo Zhao

George Washington University ( email )

2121 I Street NW
Washington, DC 20052
United States

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