A Study On Convertible Bonds Financing Of Listed Companies In China

Convertible bond is a bond that bondholder has the right to converse the bond to a specified number of common stock shares of the issuing company based on predetermined terms.Due to its low cost,small cash-flow pressure and high growing potential,Convertible bond has been popular among companies and investors.The international convertible bond market has become the third largest security market after stock-and bond-markets(Bloomberg,2014).The course of convertible bond’s development in China has been shorter compared with foreign markets.The maturity of the market and the richness of convertible bond derivatives have been weaker compared with American market and European market.Therefore,studying the financing attributes and risk-shifting incentives of convertible bond in China is important for its further development.This study first reviews convertible bond as a financial product,including its origin,characteristics,history and status.Then by comparing convertible bond market in China and in foreign countries,this study summarizes the features and existing problems of China’s market.Based on the summarization,this paper conducts empirical analysis on causes and effectiveness of convertible bonds financing in China.And using the empirical results,this thesis gives prospects of convertible bond market in China,and proposes recommendations for its further development.First,this thesis selects sample data from issued convertible bonds dating from August 1998 to August 2016.I choose financial leverage,financial slack,free cash flow ratio,tax burden,growth opportunities,and scale,as variables.Comparison sample comes from listed companies of China’s Shanghai and Shenzhen Exchanges.This thesis selects companies who have met the requirement of applying convertible bond issuing but haven’t applied as the comparison group.Using binary logit regression model,the value and significance level of these coefficients are studied.The result shows that growth opportunity is positively related to financing decision,while financial laxity,free cash flow,and scale are negatively related to the financing decision.Meanwhile,leverage and tax burden are not significantly related to the financial decision.This study examines the robustness check by expanding sample size,using Tobin’s Q theoretical formula,and using the company’s market value calculation method.The robustness test shows that the result is reliable.Furthermore,the result shows that companies take financial laxity and growth opportunity into consideration when they make financing decisions.Second,this thesis uses a sample of 15 convertible bonds issued from December2014 to December 2016 by listed companies in China to test risk-shifting theory.Referring to Eom(2008),Dorion(2014),this study uses the principle of B-S option pricing model to priceconvertible bond,stock and straight bond.Then I compute Risk-Shifting Incentives(RSI)to measure the effect of convertible bond issuing on shareholder incentives.Through comparing the real risk-shifting index and the assumed risk-shifting index,this study concludes that convertible bond financing in China can be explained by risk-shifting theory,and has the effect of reducing shareholder’s risk-shifting incentives.Finally,this study looks at the futuredevelopment of Chinese convertible bond market and makes policy implications based on the analytical results.