Research Of Convertible Bonds Problems

Convertible bonds is an important refinancing tool. However, the refinancing of convertible bonds appears some bad characteristics, such as the behavior is irregular, the issuing motivation is non-rational and so on, which will violate legal rights and interests of minority shareholders. Further more, it will hinder the healthy development of capital market. This paper studies the issuing motivation and equity dilution of convertible bonds by means of empirical research.Based on the theory of capital maintenance, this paper analyzes the main problems of convertible bonds refinancing in the listed Companies in China, which are in an environment of highly centralized equity and imperfect capital market. The main problems of convertible bonds refinancing are as follows:First of all, the goal of convertible bonds refinancing is not enterprise value maximization but private benefits of control maximization, in other word, the issuing motivation is irrational. Second, more and more short duration leads to convertible bonds become a substitute for equity financing gradually. Third, frequent adjustment of convertible with large range adds to the degree of dilution of convertible bonds. At last, supplement of convertible bonds and dividend policy becomes a new way of large shareholder tunneling.This paper takes A-shared listed companies who has had issued convertible bonds in the period of the year2002and2011in China as research sample. In the same time, we employ a method of indirect test to inspect the tunneling of large shareholders. The method measures minority shareholders’ interests with cumulative abnormal return, measures large shareholders with separation of two rights, control the length of chain and share ratio of the largest shareholder. The result shows the relation of cumulative abnormal return and separation of two rights is significant negative. Similarly, the relation of cumulative abnormal return and control the length of chain and the relation of cumulative abnormal return and share ratio of the largest shareholder are the same. The results suggest the issuing motivation of convertible bonds is large shareholders occupation. Further more, Exogenous financing constraints, which comes from regulatory authorities’demanding requirements for refinancing and financial institutions’ strict censorship.restrain large shareholders motivation of occupation effectively, and then protect the interests of minority shareholders correctly and play a positive external effects. Namely,exogenous financing constraints possess the functions of external governance partly. In the same time, For accounting company internal governance and accounting information quality, ownership control mode, the behavior ability of the independent directors, source of management and accounting information quality significantly affect the large shareholders’ occupation motivation of convertible bond refinancing.Other than the front, the influence of pyramid structure, balanced concentrated ownership structure and managerial stockholding to the large shareholders’ occupation motivation of convertible bond refinancing is weaker. The significance level is decreased with interference of external institutional environment and accounting information quality. In a word, the results suggest that the external institutional environment and accounting information quality with corporate governance is a trade-off in terms of investor protection.This paper explores influencing factors equity dilution in convertible bonds. First,we employ PSM to get internal factors. The result shows convertible bonds’dividend policy, the quality of accounting information and stock characteristics exist significant differences with paired sample, but profitability has no significant difference.As can be seen from the on, internal factors of convertible bonds dilution degree include dividend policy, profit ability and the quality of accounting information. Further more, the listed companies who have issued convertible bonds are with irrational dividend and earnings management behavior to accelerate conversion. Second using factor analysis and regression method, we find Macro economic development has significant influence on the degree of dilution of convertible bonds. But influence degree is decreased with accounting factors of corporate governance and company characteristics. And that the major aspects of influence to the degree of dilution of convertible bonds are profitability of listed companies, equity structure characteristics, the quality of accounting information, dividend policy and stock characteristics.In a word, the research of this paper indicates the issuing motivation of convertible bonds is large shareholders occupation and the controlling shareholders use earnings management and malicious cash dividend policy to accelerate conversion.By doing so,they achieve the purpose of dilution cash flow right belonging to minority shareholder and transfer company’s profits indirectly. That is a further approach of erosion of small and medium shareholders’ interests. for one thing. Regulator must carry out more stringent refinancing threshold and implement the market-oriented management to guard against abuse effectively. At the same time, they need rule financial standards about whether to pay cash dividends and the dividend payment rate threshold to prevent the listed company cash dividend distribution behavior blindly. Of course, it also includes other methods. For another thing, the listed companies strive to improve internal environment of corporate governance, so it gives full play to the positive effects of large shareholder governance and the action of the internal supervision functions of the board of directors and management. Finally, we should strengthen the supervision about the behavior of convertible bonds of financial information recognition, measurement, record and report in listed companies. By doing so, it can improve the accounting information authenticity and reliability. Meanwhile, regulating non-financial information disclosure behavior related to convertible bonds is necessary, which can reduce the information asymmetry of small and medium shareholders.