An announcement effect in reverse? Evidence from cash-settled convertible bonds

We analyze the trading activity of underlying shares at the maturity of convertible bonds with cash-settlement provisions. Our findings indicate that arbitrageurs and option dealers engage in systematic trading that leads to an increase in trading volumes and changes in the level of short interest in the affected underlying equities. We find significantly positive abnormal returns for the affected stocks if convertible bond-related trading is not contaminated by opposing option-related flows. This finding supports the notion that arbitrageurs can create a substantial market impact on shares underlying convertible bonds even without any relevant news dissemination.