Stock Options and Corporate Actions: Convertible Arbitrage, Share Repurchases and Options

Abstract

We investigate whether the availability of options for trading affects corporate actions using convertible bond offerings as an example. A significant percentage of convertible bond issuers simultaneously announces share repurchases (combined offerings) to help arbitrageurs take short positions without causing much negative impacts on share prices. Since stock options are known to mitigate short constraints, the availability of stock options is likely to affect firms’decisions regarding the use of combined offerings. We find that combined offerings are substantially more common among the issuers with stock options. We also find that hedge funds involvements, offering discounts, short interests and nnouncement period abnormal returns are significantly affected by the availability of option and the use of combined offerings. These findings are consistent with the possibility that the availability of option significantly affects corporate actions and firms benefit from the explicit consideration of the availability of option in making their decisions.

Speaker

Inmoo Lee, KAIST
Research interests: Various investment and corporate finance issues including insider trading, securities offerings, share repurchases, investment decisions and corporate risk management.