An Analysis On The Impact Of The Exchangeable Bond Issuance On The Price Of Its Subject Stock

The exchangeable bond appeared in China’s bond market in 2013 for the first time.By the end of 2018,220 exchangeable bonds had been issued in China’s bond market,with a total scale of 26,392,500.00 million yuan.However,the market share of the exchangeable bond is still less than 1% and it is still a relatively new financing tool for Chinese issuers.With regard to the academic research,there is little study about exchangeable bond.The present study about exchangeable bonds mainly focuses on its advantages over other financing methods,its application and the risks of private exchangeable bonds.As a financing method with both “debt character” and “equity character”,the exchangeable bond has been equipped with unique internal mechanism.Not only can the exchangeable bond be used in financing but also it can achieve multiple purposes,reducing the shares included.Therefore,the exchangeable bond is worth studying both in practical application and in theoretical exploration.The theme of this paper is the impact of the issue of the exchangeable bond on the price of its underlying stock and the underlying stock refers to the stock pledged by the issuer when issuing exchangeable bonds.This paper mainly analyses the change of the short-term return and the long-term volatility.The first chapter of this article mainly builds the theoretical basis of the paper through literature analysis of previous relevant research.The operation mechanism,issuing conditions and the current situation of China’s exchangeable bonds are introduced in chapter II,which not only confirms the theoretical and practical significance of the study,but also lays the foundation for the theoretical analysis in the following chapter.The Chapter III theoretically analyses the impact of the issue of exchangeable bonds on the underlying stock price.The exchangeable bonds will send signals to the market through their terms of issue.If the issuer delivers a reduction intention to the market when issuing exchangeable bonds,the market will be short at underlying stock.And the event study method and the FamaFrench Three-factor Model with GARCH are used in the empirical study to analyse the short-term and long-term impact of the issue of exchangeable bonds on the underlying stock price in chapter IV.At last,the conclusions and the suggestions from the perspective of issuers,financial institutions,regulators and investors are put forward in chapter V.Through empirical analysis,this paper finds that the issue of exchangeable bonds will impact a negative but not significant impact on the underlying stock price in the short term near the announcement date.The volatility of the underlying stocks in half a year before the issuance announcement of exchangeable bonds is evidently higher than that in half a year after the issuance announcement and the issuance of exchangeable bonds will stabilize the volatility of underlying stocks over a long period of time.It is proposed that the exchangeable bond is ought to be attached greater importance,the regulators should adopt more flexible policy for the exchangeable bond,the financial institutions are expected to pay more efforts in designing targeted issuance plan of the exchangeable bond for different enterprises.issuers and investors should get more knowledge of the exchangeable bond so as to choose exchangeable bonds to finance or invest exchangeable bonds more appropriately.