A Study On The Announcement Effect And Influencing Factors Of Conversion Price Downward Resetting Of Convertible Bond

As a structured financial product with both equity and debt,convertible bonds have many advantages for issuers and investors.Influenced by the "new rules on refinancing" issued in 2017,the financing channels for private placement have been tightened,and the issuance of convertible bonds and preferred shares has been encouraged by policies.The issuance scale of convertible bonds has been catching up with the private placement,and the market has expanded rapidly,becoming one of the mainstream ways of refinancing.Transactions in the secondary market of convertible bonds has become increasingly active,also more and more institutions and individual investors involved.But the terms of the convertible bond are complex.Moreover,due to the relatively late start and development in China,there are few studies on the downward revision clause of convertible bonds.However,the downward revision game has been paid more and more attention,so it is timely to study the announcement effect of conversion price downward resetting.Based on the Event Study Method,this paper takes[-10,10]days before and after the downward strike price announcement as the window period of the event,and selects listed companies that have issued the downward strike price announcement proposed by the board of directors from January 2008 to July 2019 as samples to empirically study the announcement effect.Through the calculation and analysis of the Average Abnormal Return and the Cumulative Average Abnormal Return of the sample convertible bond and the share,this paper believes that the announcement of conversion price downward resetting is good news for the convertible bond investors.Average Abnormal Return of convertible bond on announcement day is the most obvious.The Average Abnormal Return before the announcement indicates that the information has probably been leaked in advance and insider trading exists.Both the advance reaction and overreaction before and after the announcement provide strong support for the fact that China's convertible bond market has not yet reached semistrong-form.In addition,this paper also found that the announcement effect of conversion price downward resetting on share is not very significant negative effect.In this paper,a multiple linear regression model was established to further study the factors influencing the positive effect of conversion price downward resetting on cb.The Cumulative Average Abnormal Return was taken as the explained variable.Through previous literature analysis and theoretical analysis,7 factors were selected from the level of convertible bonds and companies as the explanatory variables.The results of regression analysis show that:during the window period of the event,the four explanatory variables of conversion premium rate,conversion dilution rate,asset-liability rate and free cash flow have a significant negative impact on the Cumulative Average Abnormal Return of cb,while the return on equity has a significant positive impact on the Cumulative Average Abnormal Return of cb.However,the shareholding ratio of the largest shareholder and company size have no significant effect on the announcement effect of cb.The results of empirical research in this paper are mutually supported and verified by theoretical analysis of backdoor equity hypothesis,free cash flow hypothesis,and motivation of downward strike price.The Cumulative Average Abnormal Return of cb during the window period of the event largely depends on stock property and debt property of convertible bonds,as well as the long-term performance of shares.Finally,this paper puts forward countermeasures and Suggestions for investors,issuers and regulators.