Hedge funds as international liquidity providers: evidence from convertible bond arbitrage in Canada
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We examine the impact of Canadian convertible bond issuance on equity market liquidity. Using issuance event dates between April 2002 and March 2011, we analyze the change in short interest and stock liquidity during a 1-year event window. We consider mainstream liquidity measures, including turnover, dollar volume, dollar spread, percentage spread, and the ratio of daily absolute stock return to dollar volume. We find that after convertible bond issuances, there are significant increases in short interest, but minimal overall improvements in liquidity. The change in liquidity is not significantly related to the change in short interest, except for the firms with large change in short interest. Interpreting increased short interest after issuance as a proxy for convertible bond arbitrage activity, the results suggest that there is limited positive liquidity externality of hedge fund activity in Canada.
KeywordsStock liquidity Short interest Convertible bond arbitrage
JEL ClassificationG12 G14 G15
We acknowledge helpful comments from an anonymous referee and the editor, as well as from participants at the 25th Australasian Finance and Banking Conference, the 2013 Auckland Finance Meeting, and the 2014 International Conference on Business and Information.
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