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Understanding convertible bond issuances of Chinese listed firms

Understanding convertible bond issuances of Chinese listed firms
Understanding convertible bond issuances of Chinese listed firms
Motivation: this paper investigates why Chinese firms issue convertible bonds.
Premise: Unlike their counterparts in the United States and the European Union, most convertible bonds issued by listed firms in China from 2003 to 2014 are converted to equity before the maturity date. This indicates that the convertible bond in China is used as a backdoor equity financing instrument.

Approach: by using a sample of 77 convertible debt, 655 straight debt, and 1,089 seasoned equity issues in China from 2003 to 2014, we employ a multinomial logit model.

Results: our regression results show that firms are more likely to issue convertible bonds rather than straight debt when the debt-related cost is low and stock price run-up is high while, compared to seasoned equity issuers, firms issue convertible bonds when the risk-free rate is low.

Conclusion: the overall results suggest that while listed firms in China still seek equity financing first, they issue convertible bonds to take advantage of the interest rate deduction with the assurance to their investors that the convertibles can be converted to equities. In addition, most convertible bonds were underpriced on the offering date, suggesting convertible bond issuers do not exploit the local investors in China.

Consistency: our understanding on the convertible bond issuance is mainly based on firms in developed markets. Little is known about Chinese firms in this regard. In this paper, we study why firms issue convertible bonds in China by investigating 77 convertible bonds, 655 straight debts, and 1,089 seasoned equities issuances from 2003 through 2014. We find that the average of the expost actual conversion rate of convertible bonds is 96.18 percent, indicating that almost all convertible bonds in Chinese stock markets were eventually converted to equities, which is a strong indication that convertibles are used as delayed equity. This motivation is reflected with the equity-like design of most convertible bonds in the Chinese market.
0034-6454
76–97
Liuling, Liu
2d3a11fa-c76b-440f-b25b-5fcd2e9f1bf2
Shen, Hao
7c9fdb25-d7b6-4d83-9624-019ec786c37c
Wang, Peng
9496fb0a-1c17-4b6b-a755-aedf19bb83e5
Zhang, Lin
e1d600fe-6c28-40db-8315-ddcee4111936
Liuling, Liu
2d3a11fa-c76b-440f-b25b-5fcd2e9f1bf2
Shen, Hao
7c9fdb25-d7b6-4d83-9624-019ec786c37c
Wang, Peng
9496fb0a-1c17-4b6b-a755-aedf19bb83e5
Zhang, Lin
e1d600fe-6c28-40db-8315-ddcee4111936

Liuling, Liu, Shen, Hao, Wang, Peng and Zhang, Lin (2022) Understanding convertible bond issuances of Chinese listed firms. Review of Business, 42 (2), 76–97, [4].

Record type: Article

Abstract

Motivation: this paper investigates why Chinese firms issue convertible bonds.
Premise: Unlike their counterparts in the United States and the European Union, most convertible bonds issued by listed firms in China from 2003 to 2014 are converted to equity before the maturity date. This indicates that the convertible bond in China is used as a backdoor equity financing instrument.

Approach: by using a sample of 77 convertible debt, 655 straight debt, and 1,089 seasoned equity issues in China from 2003 to 2014, we employ a multinomial logit model.

Results: our regression results show that firms are more likely to issue convertible bonds rather than straight debt when the debt-related cost is low and stock price run-up is high while, compared to seasoned equity issuers, firms issue convertible bonds when the risk-free rate is low.

Conclusion: the overall results suggest that while listed firms in China still seek equity financing first, they issue convertible bonds to take advantage of the interest rate deduction with the assurance to their investors that the convertibles can be converted to equities. In addition, most convertible bonds were underpriced on the offering date, suggesting convertible bond issuers do not exploit the local investors in China.

Consistency: our understanding on the convertible bond issuance is mainly based on firms in developed markets. Little is known about Chinese firms in this regard. In this paper, we study why firms issue convertible bonds in China by investigating 77 convertible bonds, 655 straight debts, and 1,089 seasoned equities issuances from 2003 through 2014. We find that the average of the expost actual conversion rate of convertible bonds is 96.18 percent, indicating that almost all convertible bonds in Chinese stock markets were eventually converted to equities, which is a strong indication that convertibles are used as delayed equity. This motivation is reflected with the equity-like design of most convertible bonds in the Chinese market.

Text
4. RoB-2022-0221R1 (Understanding convertible bond issuances of Chinese listed firms) (1) - Accepted Manuscript
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More information

Accepted/In Press date: 3 May 2022
Published date: 30 June 2022

Identifiers

Local EPrints ID: 468532
URI: http://eprints.soton.ac.uk/id/eprint/468532
ISSN: 0034-6454
PURE UUID: 2fa54138-fb44-4fc4-9a21-f7e9c213d32a
ORCID for Peng Wang: ORCID iD orcid.org/0000-0002-0081-5598
ORCID for Lin Zhang: ORCID iD orcid.org/0000-0001-6113-8482

Catalogue record

Date deposited: 17 Aug 2022 16:51
Last modified: 10 Jun 2024 01:58

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Contributors

Author: Liu Liuling
Author: Hao Shen
Author: Peng Wang ORCID iD
Author: Lin Zhang ORCID iD

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