Study Of Exchangeable Bond Term Design And Major Shareholders' Reduction Behavior

As a new financing method,exchangeable bond cannot only realize debt financing but also cashing out stock,which has many advantages over other financing methods.In recent years,with strict restrictions on the major shareholders' reduction behavior by the regulatory agencies,exchangeable bond has become a new shareholders' reduction channel.When exchangeable bond holders decide to swap exchangeable bonds for stocks,major shareholders can reduce their holdings during the process.Because regulatory agencies have not enforced strict restrictions on this kind of reduction behavior,there have appeared many cases that major shareholders successfully reduced their holdings of listed company stocks via exchangeable bond.By reviewing and summarizing the relevant literature,the author finds that exchangeable bonds are used for various purposes and their terms are complicated,while Chinese scholars have not carried out thorough study of exchangeable bonds.According to existing studies,major shareholders reduce their holdings for arbitrage,bearish or tunneling reasons.The market usually interpret major shareholders' reduction behavior into negative signals and thus respond strong negative reaction.Some studies believe that the exchangeable bonds can reduce the impact of major shareholders' reduction on the market.After literature review,the author comes up with these questions: When major shareholders issue exchangeable bonds for reduction motivation,can the market recognize major shareholders' motivation? If the market dose recognize the major shareholders' motivation,can exchangeable bonds really help reduce the negative impact? Besides avoiding regulation and reducing negative impact,is there any other benefit that major shareholders can get from this new reduction channel?This article uses the case of Tunghsu Group to discuss the questions above.Firstly,the article combs terms of 187 exchangeable bonds issued from 2008 to 2017.This helps to understand exchangeable bonds and their terms in general and lay the foundation of case analysis.Combined with the analysis above,the author conclude that Tunghsu Group has set up extraordinary exchange earnings,passive call provisions,strict put provisions and positive modification provision to encourage exchangeable bond holders swap bonds for stocks,so that he can reduce his stocks successfully.In practice,as Tunghsu Group issued exchangeable bonds,the market immediately identified his motivation is to reduce his holdings and the market does have a negative reaction on the stock price.However,when Tunghsu Group's exchangeable bonds' holders began to swap bonds to stocks,the market did not show a strong negative reaction because the market has already have expectations.In the other hand,the negative reaction is far less than the market reaction to major shareholders' reduction in traditional ways.It means exchangeable bonds did reduce impact to the market.Finally,by comparing the yield of the reduction via exchangeable bonds to reduction via traditional ways,the author finds that the exchangeable bonds can not only reduce the impact on the market,but also enable major shareholders to use restricted stocks to cash out in advance and add earnings.Through the article's analysis,the author gives some suggestions to the major shareholders like setting reasonable terms,paying attention to market reaction and preventing the risk of issuance.The author also gives some other suggestions to the regulatory agencies like recognizing issuers' motivation accurately,perfecting the legal system and encouraging institutional investors' participation.This article has three expected contribution.Firstly,this article has collected large amount of data and described exchangeable bond's situation,features,terms and laws,which supplements domestic study of exchangeable bond.Secondly,this article establishes a close connection between reduction motivation and term design of exchangeable bonds and this can provide a good reference of how to recognize reduction to the market.Thirdly,through case analysis of Tunghsu Group,this article reveals the difference of reduction via exchangeable bonds and reduction via traditional ways such as market reaction and major shareholders' earnings.It can help the market know this new reduction channel better.