Listed Companies In China Convertible Bond Financing Study Of The Impact On Stock Prices

Convertible bond (CB) is a very popular financial instrument in the world capital markets. It is a kind of corporate bonds, but the bonds entitle the holders based on their own free will to convert the bonds into stocks after a certain period of time.In this paper, we study the stock price of listed companies in China after the issuance of convertible bonds. The reason for conducting this study is based on the following factors:1. For listed companies refinancing, Convertible Bonds play an increasingly important role.Taking convertible bonds history in China, from RMB30 million in 1991 of the issuance of convertible bonds of Qiong Energy, CB market has been experiencing five times (exploration, initiate, development, peak, cooling). Until 2003-2004, China has entered a peak period of the convertible bonds. Convertible bonds become the first choice for refinancing of the listed companies, and financing scale has reached nearly RMB20 billion. Later because of the equity division reform starting from 2005, the issuance of convertible bonds cooled down. But in the second half of 2006, with the end of the equity division reform, China has again started the issuance of convertible bonds, so Convertible Bond financing will once again become an important means of a listed company.2. Convertible bond is a relative new method of financing of listed companies Convertible bond is a combination of stock and debt. Therefore, this method of financing also affected the secondary market stock prices. So further understanding of its impact on the secondary market stock prices can be helpful for decision-making on the choice of refinancing means on some degree.3. Convertible bond is a relative new product to investors. Due to flexibility of convertibility,CB can attract investors. As there is link between the issuance of CB and the stock price on secondary markets, the study of the impact on stock prices can help investors getting more earnings and avoiding risks.4. Affect the entire secondary market On some degrees, the issuance of the CB will also influence the trend of the whole secondary market.For above reasons, we feel that further research on this issue has a definite meaning.This paper is divided into six sections: In the first section, we have a brief introduction on the pricing of CB, referred to the alternative assets hypothesis, risk estimation hypothesis and deferred stock hypothesis and so on. Because the hypothesis is discussed in the scope of convertible bonds pricing, which is not the content of this paper, only brief exposition is provided.Thereafter, we summarize study on convertible bonds cases of some mature capital markets in Western countries, including the United States, Japan, Britain and the Netherlands market, and highlighted a number of classic empirical papers in the field. Meanwhile we also gave a briefing on the research by some Chinese scholars on CB.In section II and III, we summarized the relevant economic theory and empirical research methods. In this part, we introduce the market model and means model by which we need to calculate the abnormal rate of return after the test statistic. Then, we briefly explain some economic theories on the impact of convertible bonds on the secondary market prices, from the perspective of the interests of shareholders, corporate governance and the market.In section IV, and V, we give an empirical study according to the above-mentioned method. This is the core part of the paper; we first introduced the samples and variables, and give some descriptive analysis. Then, we use the market model and the mean model to detect the abnormal rate of return after the statement issuance of the convertible bonds. Afterward, we inspected the long-term trend of stock prices based on some relevant variables. In this article VI, we provided the following results based on above empirical analysis.First of all, in China's market, when the company announced the issuance of convertible bonds, the company's significant abnormal share yield is negative. This shows that in the Chinese market, the equity components of convertible bonds occupies the largest proportion, in other words, issuance of convertible bonds is largely deemed as equity financing alternatives. Secondly, from a long-term perspective, the stock market value of convertible bonds is still associated with the debt rate and growth performance. So we can see that with the passage of time,the recognition on the value of convertible bonds to finance growth and the positive impact of performance is gradually growing, therefore the underestimate of the market value of the stock prices would be modifiedIn addition, issuance announcement of convertible bonds will be accompanied by other public announcements, so the effect of the announcement on stock price is normally weakened.