Convertible Arbitrage Price Pressure and Short-Sale Constraints

Convertible arbitrageurs combine long positions in convertibles with short positions in the underlying stock. We exploit worldwide differences in short-sale constraints to examine whether convertible arbitrage short selling creates downward pressure on convertible issuers' stock prices. Using a sample of 4,148 convertibles issued over the period 1990-2009 by firms listed in 35 different countries, we find that short-sale constraints have a positive effect on issue-date abnormal stock returns. The effect is stronger in years with higher hedge fund involvement, as well as for offerings expected to induce more arbitrage short selling. Our findings suggest that a substantial part of the stock price effect of convertible bond issues is attributable to convertible arbitrageurs