Tookes on the Supply of Capital

Heather Tookes, an associate professor of finance at the Yale SOM, studies the effect of the supply of capital on firms' financing decisions, questioning the conventional wisdom that the manner of financing is driven largely by firms' demand.

Convertible bonds — bonds that can be converted into stock — provide insights into this question because the bonds are largely financed by hedge funds. Tookes has shown that the flow of capital into convertible bond arbitrage hedge funds does affect the terms at which the bonds are sold.

Tookes took advantage of a natural experiment in the fall of 2008, when a temporary ban on short selling prevented the funds from hedging their convertible bond sales by shorting the underlying stock. She found that while all securities suffered during that period, convertible bonds fell disproportionately — and that when the ban on short selling was lifted the supply of the bonds recovered quickly.