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Share Price Effects of Convertible Bond Issues: An Empirical Study of China's Listed Companies

Convertible bond is a hybrid financial product between ordinary bond and common stock, investors have the rights to convert it to the company\
Submitted On: 04-01-2010 | Views:	Article Tools:

Convertible bond is a hybrid financial product between ordinary bond and common stock, investors have the rights to convert it to the company's common stock in certain period. China's convertible bond started in 1992,but has been gradually accepted as a popular refinancing tool by some listed companies till 2002.Compared to the world's mature convertible bonds market ,China's convertible bonds are still in the infancy, the amount and category are both small. Therefore, promote financial innovation and develop the convertible bonds market in China will play an important role to the prosperity of our capital market.In 2006,when the securities market is in the process of share reform in China, a new round of the refinancing boom, the separably-traded convertible bond has drawn great attention as soon as its appearance. In this paper, some related issues of this innovative financial instrument on structural designing, investing and financing advantages and risks are discussed. And the share price effects of convertible bond issues are studied.The samples are selected from April 2001 to September 2007 when the listed companies'board announce the issue programmes of convertible bonds and separably-traded convertible bonds for the first time. Discounting the listed companies of financial sectors and the samples that have other major incidents announced in the event day or the two days before or after .There are 69 samples retained, including 11 companies which issue separably-traded convertible bonds. Event study is used in this paper, research on the average cumulative abnormal return shows that the issuance of China's convertible bonds give a significant negative impact to share price.When the company issued convertible bonds, the share price fell about 1.75% in event window (0,1) and fell 1.96% in event window (-15,15).The negative reaction lasts long after the first announcement of convertible bonds' issuance. And there is nearly no information leakage before the announcement. The cross-sectional regression results show that the abnormal return during the event windows have significant positive correlation with the companies' size and the companies' relative issue size, have significant negative correlation with the companies' liabilities ratio and net assets of per share. Finally, some corresponding recommendations are given from the issuer's and monitor's point of view.

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