The Role Of Time Value In The Chinese Convertible Bond Call Policy

The redemption timing of convertible bonds has been a hot issue in the economy theory field. After Ingersoll (1977b) published his paper on convertible bonds optimal call policy, foreign scholars have paid a great deal of attention to the optimal call policy of convertible bonds. More articles elaborate the costs and benefits incurred by the redemption of convertible bonds. Having started late in China, however, the study on convertible bonds still focus on the pricing of convertible bond, few study concerns on the redemption strategy of convertible bonds. Therefore, starting from the theory of the convertible bond redemption strategy, this article summarizes previous studies and brings up a new variable-time value, which plays a crucial role in the redemption of convertible bonds but is ignored before. Then taking convertible bonds from2003to2011in Chinese bond market as sample, this paper calculated and observed changes in the time value of convertible bonds in the six months prior to redemption. Finally, based on the survival analysis model Cox, the paper carries on an empirical analysis on the influencing factors of the redemption of convertible bonds. The main conclusions are as follows:Firstly, the time value of convertible bonds increased at first and then decreased during the six months prior to redemption. At redemption, the time value of convertible bonds is about42%of the maximum one on average. Time value didn’t attain its maximum value at the time of redemption. The result indicates that the redemption strategy of convertible bonds is not influenced by only a single factor. The timing of the redemption is also trade off with other factors.Secondly, from the empirical results of the Cox model, we can find that there are two main factors affecting the redemption of convertible bonds:PB ratio and net time value advantage which we newly defined. According to theoretical analysis, we can know that, as long as the convertible bonds do not expire, in the redemption notice period, regardless of the conversion or redemption, the time value of conversion option is transferred form bondholder to the existing stockholders, and increasing the interests of the shareholders. Thus, the greater the time value, the greater likelihood enterprises tend to redemption of convertible bonds. The conclusion of our empirical research confirmed this hypothesis.Thirdly, through empirical analysis, we also draw:redemptive behavior connect with the PB ratio. Higher PB ratio represents more future growth opportunities. In the high-speed development stage, the value of the company stock more influence by the public expected,the negative signal of company’s future development come from redemption is likely to affect the company’s share price. Therefore, Small, in high growth companies are more likely to redemption convertible bonds in advance.