Convertible bond arbitrage and short-selling activity
The objective of this study is to examine the impact of convertible bond arbitrage activity onshort-selling levels of the underlying equity. We exploit changes in Reg SHO reported shortsale data to identify convertible bond arbitrage related short-selling activity. By furtherscrutinizing 335 convertible bonds around the issuance as well as for the period followingissuance. Results provide considerable evidence of arbitrage-induced short-selling for boththe period around the issuance and the post-issue period. Moreover, deal-specific charac-teristics capturing hedging demand and attractiveness of the arbitrage opportunity stronglyrelate to convertible arbitrage short-selling. Given our identification of short-selling withdaily accuracy near the issuance, our paper highlights the benefits of applying empiricalprecision to the study of convertible bond arbitrage activity.