Research On Convertible Bond Financing And Stock Price Effects

The object of the study is the convertible bonds (CBs) financing in Chinese securities market. Based on the summary of the foreign hypothesis about CBs, we research the stock price effect caused by the issue of CBs and verify the motive of the CBs issue in China.Because of the special Government Regulation in China, there are significant differences in the issuer, product design and the investor of CBs. The domestic issuers are in the traditional manufacturing. Strict approval system makes the issue of CBs become difficulty, time-consuming and often delay the timing of the market. The terms of the convertible bonds designed a very little difference and interest rate and the interest rate marketization degree is low. China’s laws and regulations play more attention to the reimbursable of CBs. But in practice, CBs is regarded as a kind of delay equity financing by listed companies, so the stock price effect by CBs are different with oversea market. By the following aspects, the paper makes some empirical researches in detail about price effect of the convertible bond financing in China:(1) We analyze abnormal returns caused by the board announcement of the CBs issue. Studies show that the underlying stocks have significantly negative CAR after announcement date. There is no significant correlation between company size, the debt-to-capitalization ratio and relative issue size and stock price effects. The price effect sends the message of the company thirst for capital which is same in other Mode refinancing(2) The study shows that price effect caused by the issue of CBs is significant positive. Chinese market appears to have a favorable attitude toward CBs, which are difference in foreign market. Using OLS we found positive effects can be explained by the company size, control person types and the equity dilution index. It means the price pressure theory still affect stock price and the price effect can only transmit the company the size of the message, but cannot transfer company value signal. The stock price effect also has a significant relationship with the degree of CBs’ equity-like. The CBs are more equity-like and higher of the price effect. From the viewpoint of the degree of CBs’ equity-like, CBs financing is a way of delayed equity financing.(3) We study the two years long-term price effect after the issuance of the CBs. It suggests that the stocks returns are same as comparable company, but beat the market index. Therefore, the main reasons of CAR are the industry factor and the size of the company, and then is the company performance individual caused by the CBs insurance. Based on the vertical dimension of time, from profitability index, growth and financial soundness indicators which reflect the financial performance indicators, the company financial performance showed a downward trend after CBs insurance. Except the profitability index decline, growth and financial soundness indicators were growth. It suggests that the CBs provide strong support for the scale of the company’s operations and the growth of the company size was give priority to the profit growth. This long-run stock price effect has significant correlation with earnings growth, the stock dividend and convertible bonds. Because the profit was a downward trend, Companies stimulate the stock price through the increase of stock dividend to compensate for the decline in performance and the dilution effect of CBs.China market held a positive attitude on the CBs financing from the view of the long-term stock price effect after insurance of CBs. Positive price effect is based on the investor expect of stock rises which relate to equity-like design of CBs, the growth in company size and a large scale delivery stock behavior.This paper draws many conclusions which advantage to the investors and the public companies. From a regulatory perspective, how to make good use of CBs for China’s economic growth when it in transition? Relax the control on the CBs issue, increasing the degree of market and eventually launched the private placement of convertible bonds may be the future direction of reform.