Convertibles and hedge funds as distributors of equity exposure

S. Brown, B. Grundy, C. Lewis, P. Verwijmeren

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

By buying convertibles and shorting the underlying stock, hedge funds distribute equity exposure to well-diversified shareholders. We find that firms with characteristics that make seasoned equity offerings expensive are more likely to issue convertibles to hedge funds. We conclude that hedge funds provide opportunities for firms to issue convertible securities at a lower cost than seasoned equity by serving as relatively low-cost distributors of equity exposure. A higher fraction of a convertible is privately placed with hedge funds when institutional ownership, stock liquidity, issue size, concurrent stock repurchases, and limitations on callability suggest that shorting costs will be lower.© The Author 2012. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved.
Original languageEnglish
Pages (from-to)3077-3112
JournalThe Review of Financial Studies
Volume25
DOIs
Publication statusPublished - 2012

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