A Study On Convertible Bond Financing Selection In China

In theory, convertible bond (CB) financing have a function to lower issuance costs andimprove the governance performance for specific issuers. By applying the method ofnormative analysis and empirical research, this dissertation probe firstly into thetheoretical mechanism and approach of this function. Then, the author makes ameliorationto the analysis paradigm used by lots of formerly studies that based on 'firm features-stockmarkets reaction to announcements of issues', establishes an improved analysisframework based on interdependent 'firm features-security design-governanceperformance'. Rest on the improved framework, this dissertation studies and depicts thechoice behavior and effect of CB financing in China, puts forward the motivation ofChinese issuers and tries to explain this motivation from the given institutionalarrangement. The results of this dissertation suggest thatCB issuers are low leveraged, big firms with short growth opportunities, low volatilityof operating incomes, small free cash flow and high assets-in-place. The firm features ofissuers are inconsistent with theoretical expectation. Because most of issuers ignore theirgrowing features and specific risk exposure, convertible bond financing was chosenirrationally in China.Security design are strong similar, the clauses of CB don't signal rationally specificallyagent problem and information asymmetry problem that the issuers have to face, butsignal reversed information to some extent. Most of issuers ignore the derivativecharacteristic of CB and its flexibility design to accommodate specific financing problem.The aims of security design are strong likely to offer an equity-like CB that meet theissuer's request of avoiding financial distress, as well as maximizing private benefits of'insider control'.Firms on average have a remarkable decline in the governance performance followingthe CB offering, the function of minimizing external financing costs and improving thegovernance performance for specific issuers actually doesn't exist in China. The problemwe should pay close attention is that, however the samples be plot, the main operatinggrowth ratios of issuers significantly goes up. Otherwise, the operating income relative toassets (EBITDA/assets)/retum on total assets (ROA)/profit margins (CROA) of issuerssignificantly declines respectively; some of these indexes even have a negative growth.The author considers that this main operating growth embodies the expansion in issuer'sbusiness and sizes so as to maximizing private benefits of 'insider control', there are noevidence this growth make any good help to the issuer's governance performance.Although CB financing help improving highly leveraged issuer's performance in a certain extent, but this effect is every limit because most of the issuers arc low leveraged firms.On the whole, the existing theoretical models and hypothesizes can't explain thechoice of CB in china. Convertible bond as a simple equity substitute so as to maximizingprivate benefits of 'insider control' is the issuers' motivation and main explanation inChina, where the 'insider' might include finn's controlling shareholder and managers.This financing motivation can't be simply attributed to the dual characteristics ofownership structure in Chinese listed companies, it actually embodies the issuers 'rational'selection under comprehensive incentives from a series of institutional arrangement. Inorder to transform this irrational financing motivation, on the one hand, the supervisiondepartments should mend or perfect relative institutions and policies. In addition to theinstitutional defect on the corporate governance that need improve, there are some visibleinstitutional defects that can be improved practically on the supervisory system, marketperforming system, etc. On the other hand, the issuers should have rational expectationsabout the institutional and its restriction mechanism changes; set up the views ofcomprehensive financing cost, views of long-run governance performance and views ofstakeholder's governance. Furthermore, issuer who choice CB as a external financinginstrument should match his own specific agent problem and risk exposure with the givenfinancing pattern, and do attach importance to the signal function of CB's clauses and itsflexibility design accommodating specific financing motivation in security design.