The Valuation Effects Of Convertible Bonds

Modigliani and Miller pointed out that, in the perfect capital market, different financing methods have nothing to do with the company value. Compared with the equity financing, the debt financing had no special advantages or disadvantages. But some company financing theories canceled one or several assumptions in the ideal capital market, and find that under the general conditions, the financing methods had the important influence on the company value, this conclusion can be expanded to convertible bonds. The article tries to solve those problems: in China, what are motivations of issuing convertible bonds? How the market reacts to the announcement of convertible bonds issuing? How much is the wealth effect of convertible bonds? And will the convertible bonds influence the operate performance of public companies?The firstly, the article analyzes the motivations on the issuing of convertible bonds in China. Due to the special institutional backgrounds of convertible bonds in China, the public companies do not change the preference to the equity financing when they choose the convertible bonds. They use convertible bonds as the substitution of equity financing in situations when they can't issue stock. Then under this motivation, the market obviously will make a negative reaction to the convertible bonds issue.The secondly, under this motivation, is the choice rational? For answering this problem, the article examines the influence factors of the decision of issuing convertible bonds. The research finds that five factors (the Scale of company assets, Assets Liabilities Ratio, Return on Equity, the Ratio of listed stock, and the Account value of per share) have significant influence on the choice of issuing convertible bonds. The effects of Assets Liabilities Ratio and Return on Equity are negative. And the effects of other factors are positive. These results mean that the company's choice of convertible bonds is rational.The thirdly, the article studies the stock price effect of issuing convertible securities, and finds the issuing has significant negative effects on shareholder wealth. The results accord with the analysis for the motivations on the issuing of convertible bonds in China. It indicates the announcements of convertible bonds are adopted as a bad news by the market. Further, the article uses regression analysis to examine the relations between abnormal returns and finance indicators. The cross-sectional regression results suggest that abnormal returns are mainly related to the firm's size and the net operating cash flow of per share. And the abnormal returns are negatively related to the firm's size, positively related to the net operating cash flow of per share.Finally, the article studies the convertible bonds influence upon the operating performance of public companies. This study has found that the operating performance descend obviously after issuing convertible bonds; However, compared with the matched firm in the same industry, these issuing companies are better than them.The research pays attention to the combination of theories analysis and empirical examines. Many conclusions are advantage to the governments and the public companies. Certainly the article still has some problems needing a further studying.