Research On The Behavior Of Resetting The Conversion Price Of The Convertible Bonds

Reset clause of the convertible bonds, which is mean to downward adjust the conversion price, has been used for multiple terms in Chinese market. The clause is common in the Asian market but rarely used in the United States and Europe. It was first applied in Japan, and then experienced extensive use in mainland China and Taiwan. Most previous studies mainly focus on pricing the convertible bonds with reset clauses, that is, from the perspective of the holders of convertible bonds. Since convertible bonds have the character of bonds and equity, the value of equity investors also can be affected.This paper aims to study the behavior of the resetting decision on the conversion price of convertible bonds, exploring the factors that may affect this decision. From the perspective of control rights and financial crisis, analyze the benefits and costs of the behavior and come to the condition. Then, this paper createsempirical correction regression analysis through samples between 2002 and 2013, innovatively uses the extent of the adjustment for explanatory variables, explained by the terms of capital structure and other financial indicators. Due to the small sample size of convertible bonds, some important factors cannot be included by regression analysis, this paper also analyzes through some cases, supplement the other reasons.This paper comes to the following conclusions:(1) the announcement effect the conversion price resetting was not significant, indicating that the limited amount of information contains. (2)the control rights of controlling shareholders and the financial crisis are an important factorswhen considering whether to adjust the conversion price. Companies tend to adjust the conversion pricewhen the financial condition had significantly improved,and the worse the financial situation, the more willingness. Meanwhile, the extent of the adjustment and the controlling shareholder dilution are also closely related. (3) other factors affect the company’s decision include whether the company is state-owned enterprises, the pressure of repurchase, the relationship between the share price and net assets per share, the stock market’s overall environment and so on. These factors also reflect that the decision is the result of the game with the new shareholders.Design differences between reset clause and put clause, leaving convertible bonds investors unprotected. Issuers should try to protect the rights of bonds investors when dealing with the relationship between two types of terms. In addition, some constraints should be added to provide some protection for the interests of minority shareholders.