The buyers' perspective on security design: Hedge funds and convertible bond call provisions
Bruce D Grundy, Patrick Verwijmeren
Journal of Financial Economics | ELSEVIER SCIENCE SA | Published : 2018
We provide evidence that security design reflects the interplay of capital supplier and security issuer preferences. While call provisions have historically been the default option in convertible security design, only a minority of post-2005 issues are callable. Because hedge funds dominate the market for new convertibles today and because convertible arbitrage is less risky without callability, the recent diminution in the frequency of call provisions in new convertible bond issues illustrates the importance of the preferences of the suppliers of capital in security design.