This paper tests if uniformed short sales affect stock prices by examining short selling activities and stock price movements surrounding convertible bond issuance dates. By examining tick-by-tick data containing information on short sales as well as normal trades, we are able to extract a sample of convertible bond arbitrage from all convertible bonds issued by Korean companies for the period from January 2004 to June 2006. We find that convertible bond arbitrage activities do not reduce stock prices beyond the level that is normally affected by convertible bond issuance without short selling. This result implies that stock market is efficient enough to absorb unexpectedly large uninformed
short sales, which casts doubt on the reasoning behind the short sale bans during the 2008 global financial crisis.
Keywords: Convertible Bond Arbitrage, Short Sale, Price Pressure
