How Does The Convertible Bond's Downward Modification Of Conversion Price Affect The Price Of Underlying Stock

Convertible bond is a kind of compound security with both equity and debt.As its low cost of issuance and it can be converted into shares to avoid repayment of principal and interest,which are favored by funders.For investors,the characteristic of “Strong offensive and defensive”is also well-received.Although Downward Modification Clauses are unique to China's convertible bonds,scholars in our country have done very little research on it.Therefore,this paper study the effects of the announcement of Downward Modification of Conversion Price(DMCP)to the price of underlying stock.This paper mainly used case analysis for study.In order to strengthen the reliability of the research results,a large sample study was also supplemented.Because the conversion period of convertible bonds in China is from the first trading day six months after the end of the issuance date of the convertible bonds to the expiry date of the convertible bonds,the announcement of DMCP may occur before the conversion period.For this purpose,we divided the announcement of DMCP into two types: the announcement of DMCP that occured before the conversion period and during the conversion period,and further studied the impact of announcement on the stock price in different periods.We taking Jiangyin Convertible Bond as an example,which triggered the Downward Modification of Conversion Price(DMCP)once before and during the conversion period.We marked the announcement of DMCP as “0” point,and Calculated the difference between Jiangyin Bank's yield and Shenzhen index's yield during the period of estimation [-110,-11] and the period of event [-10,10].Finally,the symbol test method is used to make a preliminary judgment on the impact of the DMCP on the underlying stock price in different periods.After preliminary conclusions,we use empirical methods to further strengthen the research.The empirical research part of this paper uses the event research method.we marked the downward Modification announcement as “0” point and [-110,-11] is the estimation period,[-10,10] is the event period.At the same time,we used a market model to estimate the normal return rate and we also calculated the abnormal return rate(AR)and cumulative abnormal return rate(CAR)and tested their significance.Although there is only a single sample of Jiangyin Bank and the regression results are not particularly stable,significant results can also be obtained.Research shows that the announcement of DMCP before the conversion period has no significant effect on the price of underlying stock;The announcement of DMCP during the conversion period has a significant positive effect on the price of underlying stock.In order to improve the credibility of the research results and generalize the results from cases to general,this paper also conducts research on a large sample.We screened the convertible bonds which had announcement of DMCP between 2006 and July 31,2019 through the Wind.Excluding the samples that had significant stock price impact events during the window period,we finally screened out 65 samples.The 65 samples are divided into two categories according to the time when the announcement of DMCP occurred: one is occurring before the conversion period and includes 9 samples;the other is occurring during the conversion period and includes 56 samples.We also use the event research method to calculate the average abnormal rate of return(AAR)and average cumulative abnormal rate of return(CAAR)and tested their significance.The study shows that the research conclusions in the large sample are consistent with the conclusions of the Jiangyin case study,and the results are more stable and significant.Therefore,we can draw the conclusion of this paper: The announcement of DMCP before the conversion period has no significant impact on the price of underlying stock;The announcement of DMCP during the conversion period has a significant positive effect on the price of underlying stock.Finally,we provide some suggestions to investors based on the conclusion of this paper.For short-term investors,you can consider buying related stocks after the board's announcement of modification is announced,and selling stocks 1-2 trading days after the announcement of DMCP.You should mainly consider the risk of related stock.For long-term investors,after knowing the board's announcement of modification,you can increase your confidence in shareholding,At the same time you should mainly consider the risks.