Abstract: The authors examine the extent to which excess returns from convertible arbitrage represent positive returns to managers from exploiting pricing inefficiencies versus compensation for exposure to systematic risk factors. Initial empirical tests show that when liquidity risk is excluded as a factor, a good portion of abnormal returns to convertible bond strategies appears to be driven both by overpricing of the underlying equity and apparent underpricing of convertible bonds. However, when the effects of liquidity are included, abnormal returns to convertible bond arbitrage essentially disappear and only remain localized in convertible debt trading closer to the issuance date.