Investors’ Market Reaction To Convertible Bond Issuance And Characteristics Of The Issuer

Convertible bond is one of the important refinancing methods for companies and convertible bond market has experienced a rapid development these years. On one hand, it has the features of ordinary bond to provide debt service. On the other hand, the embedded call option enables investors to share the profit of underlying stock’s price increase. As a result, convertible bond is welcomed by investors. This paper analyzes the factors affecting companies’ decision making of convertible bonds’ issuance. We also explore investors’ reaction to the issuance of convertible bonds both in stock market and debt market. We hope the result can give some reference to the companies and investors.The issuance of convertible bond is subject to conditions of two aspects. One is the qualification requirements of related department and the other is the companies’ financing demand. Through an analysis of the companies which issued convertible bonds during 1998-2013, we find that all the companies have the following characteristics. They have been established for a long time to develop into a mature stage. They have large size, high ownership concentration, strong profitability, general growth rate. We use Tobin’s Q as an indicator to measure the companies’future growth opportunities. It shows that the Tobin’s Q of companies which issue convertible bonds is significantly greater than one. It means that companies use convertible bond as a method of indirect equity financing, mainly for investment demand.To explore the response of investors, this paper presents an empirical study of the abnormal return in stock market and the yield change in bond market before and after the announcement of convertible bond issuance. Investors in stock market have significantly positive reaction to the issuance. The abnormal return on the announcement day is+1.1044%. The positive return appears some time before the announcement and experience a reverse later on. Investors in bond market don’t have obvious reaction to the issuance. It mainly because that the companies issued convertible bonds in China are large and stable. So their solvency is not influenced a lot by the issuance of convertible bond. We use Quartile method according to Tobin’s Q value to further investigate investors’ reaction in the stock market. The study finds that the announcement day abnormal return decline with the decrease of Tobin’s Q value. However, if we expand the observation range to [-25,25], the calmative abnormal return of the second quartile is the biggest.The reaction of investors in stock market is significant, so we use the method of cross sectional regression analysis to explore the factors influencing the abnormal returns. It shows that the value state of the embedded option has significant negative influence on the abnormal returns.