Arbitrage vs. informed short selling: Evidence from convertible bond issuers |
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| Institution: | 1. Faculty of Business and Economics, University of Melbourne, VIC 3010, Australia;2. Adam Smith Business School, University of Glasgow, Glasgow, Scotland G12 8QQ, UK;3. Erasmus University Rotterdam, Burgemeester Oudlaan 50, 3000 DR Rotterdam, the Netherlands;4. Sprott School of Business, Carleton University, Ottawa, Ontario K1S 5B6, Canada;1. Department of Finance, Copenhagen Business School, Denmark;2. Department of Economics and Business, Aarhus University, Denmark;3. Department of Finance, Clarkson University, Potsdam, NY 13699, United States;1. The George Washington University, Department of Finance, Funger Hall #502, 2201 G Street NW, Washington DC 20052, United States;2. The George Washington University, Department of Finance, Funger Hall #501G, 2201 G Street NW, Washington DC 20052, United States;1. Department of Accountancy, Finance, and Insurance, KU Leuven, Faculty of Economics and Business, Naamsestraat 69, Leuven, 3000, Belgium;2. University of Zurich, Swiss Finance Institute, KU Leuven, and CEPR Plattenstrasse 14, Zurich 8032, Switzerland;3. Faculty of Economics and Business, University of Groningen, Groningen, the Netherlands |
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| Abstract: | Prior literature examines the effect of either informed or arbitrage short selling on equity markets. We test the relative importance of informed and uninformed short selling around convertible bond issues and earnings announcements for the same firms over the same time period. Convertible arbitrage short selling is associated with temporary price pressure, consistent with downward sloping demand curves. Earnings announcement short selling is consistent with informed traders who anticipate future returns. Firm-specific characteristics related to the cost of short selling similarly affect both informed and arbitrage short selling. Deal-specific characteristics capturing hedging demand also strongly determine convertible arbitrage short selling. |
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