Liquidity Externalities of Convertible Bond Issuance in Canada

The paper examines the impact of convertible bond issuance and arbitrage activity on Canadian equity market liquidity. We use convertible bond issuance event dates for the period of November 2001 to April 2010 to analyze the change in short interest, a proxy for convertible arbitrage activity, and stock liquidity during a one-year event window. Liquidity measures include Amihud, turnover, dollar volume and spread to price ratio. We find that there are significant increases in short interest, but minimal improvements in liquidity following the convertible bond issuances. However, statistical tests support that the change in liquidity is positively related to the change in short interest.