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RESEARCH ON THE ISSUING MOTIVATIONS OF CONVERTIBLE BONDS OF LISTED COMPANIES
Fu, Lili
Fu, Lili
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2024-12
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Business Administration/Finance
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https://doi.org/10.34944/hv4g-gm10
Abstract
A convertible bond is a medium- to long-term hybrid financial instrument that combines a bond with an option to convert once from debt to equity. From an investor's perspective, convertible bonds can be used as both debt to earn interest and equity to receive dividends, making them a medium- to long-term hybrid financial instrument that provides investors with flexible asset allocation. For the issuing company, convertible bonds can raise funds at a lower coupon rate and reduce the cost of adverse selection that may result from information asymmetry when raising equity financing. In addition, the option attribute of convertible bonds lets the issuing companies set a reasonable conversion equity ratio to alleviate the agency problems of the company, which is therefore favored by overseas capital markets. In recent years, the issuance of convertible bonds by listed companies in China has also increased rapidly, but in the process, problems such as overly strict issuance approval and unreasonable pricing have also emerged. Therefore, the purpose of this dissertation is to investigate the motives for issuing convertible bonds by listed companies in China, to understand the main demands of convertible bonds for issuing companies, and to clarify the impact and hindrance of existing problems for issuing companies. To this end, this dissertation conducts an empirical study on the motives for issuing convertible bonds by Chinese listed companies from the triple attributes of debt, equity and option of convertible bonds. It also analyzes the motives of convertible bond financing by listed companies in more detail from two aspects of property rights and regional economic development level to help understand the motives and demands of convertible bond issuing companies of different natures. At the same time, we propose useful suggestions to relevant departments to promote the healthy development of convertible bonds.
First, this dissertation establishes a model to calculate the financing cost of convertible bonds based on the composition of the financing cost and concludes from the calculation that convertible bonds are not a low-cost financing method compared with bank loans and corporate bonds. After eliminating the motivation of issuing convertible bonds to obtain low-cost financing, this dissertation uses the event study method to investigate the impact of convertible bond issuance on backdoor equity financing, i.e., whether convertible bond issuance can avoid the negative share price effect caused by public stock issuance, for example. The results show that the company's share price exhibits a significant negative effect before and after the announcement date of the convertible bond proposal, and the shares of the issuing company show a negative cumulative excess return after the announcement date of the proposal. This result indicates that the issuance of convertible bonds does not help companies to achieve "backdoor" equity financing.
After excluding the above two motivations, this dissertation further investigates the impact of convertible bonds on alleviating the "shareholder-creditor" and "shareholder-management" agency problems based on the option nature of convertible bonds. By constructing a multivariate regression model and conducting robustness tests, this dissertation finds that the two types of agency costs faced by the issuing company have a significant impact on the issuance design of convertible bonds, i.e., the issuing company can appropriately mitigate the negative impact of the two types of agency problems on the enterprise by setting a reasonable conversion equity ratio. In summary, the results of this dissertation suggest that the real motivation for issuing convertible bonds is to use their option nature to mitigate agency problems and optimize the allocation of risk among shareholders, creditors, and management, as opposed to "sweetening" debt financing and "backdoor" equity financing.
The findings of this dissertation supplement the application value of convertible bond issuance motive theory to the issuance of convertible bonds by listed enterprises in China, and provide insights and suggestions for listed companies to actively and correctly utilize convertible bonds and for relevant departments to guide the healthy development of convertible bond market.
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