Download Citation on ResearchGate | Convertible Bonds as Backdoor Equity Financing | Pigovian taxation of externalities has limited appeal if the tortfeaser. This paper argues that corporations may use convertible bonds as an indirect ( albeit . Backdoor equity financing hypothesis of Stein () receives universal . Thu, 08 Nov GMT convertible bonds as backdoor equity pdf -. Convertible financing. Jeremy C. Stein* bonds as backdoor equity. Massachusetts.

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Since the first issue of convertible bond in the year ofconbertible bond has become one of the most bondz financial ways in capital market. Zhang Weidong believes that when listed company issues convertible bonds, market performance will not decrease notably because there is no exploitation that non-circulation shareholders impinge on circulation shareholders [23]. Meanwhile, before converting, interest can be paid before tax and thus it has the role of interest tax shield.

De Roon and Veld study stock market influence of convertible bond in Holland and find out that abnormal profit rate is 0. Bond announcement effect, also called shareholder asset effect, mainly checks the influence of the issue of bonds to the price of company stocks.

Besides, convertible bonds exist longer abroad and issued quantities and the amount of money of convertible bonds are relative large.

The interest of convertible bonds is less than pure bonds. Cite this paper Zhang, L. As a consequence, its cost is below that of private company bonds. Finance and Accounting Monthly, No.

Xu Ziyao choose further issue, convertible bond and stock allotment as research samples in order to explore the motive of the issue of convertible bonds of listed companies [33]. Studies show that control right profit, net assets of each share and each share free cash flow have significant positive relationship with convertible bond financing of listed company.

Theoretical Basis about Convertible Bonds and Announcement Effect The short-term market performance of convertible bonds refers to the direction and degree of influence that convertible bond issued announcement has on the stock price of listed company, also called announcement effect. Conclusions Conclusions can be made on the basis of the analysis of literature review finanving scholars in various countries.

The paper is not in the journal. Studies from Abroad In the aspect of the interpret of announcement effect, information asymmetry and financing theory are the two major theories. Conversion option is added to bonds, the over-fluctuation of stock prices will be reduced and company risk will be lowered.


Convertible bond is a special bond and equty way of backdior that owns both the qualities of bonds and stocks.

Journal of Finance, 57, Research on Economics and Management, No.

EconPapers: Convertible bonds as backdoor equity financing

Convertible bond is a financial derivative which develops on the basis of normal company bond and differs in that convertible bond holders choose to convert their bonds into stocks of targeted company at a specific time and an agreed price [1].

It is the right of choice that enables convertible bond a compound derivative with the characteristics of bonds and stocks which accredit the features of its various influences on market. The article gives the literature review on the issue of announcement effect and its influencing factors of target stocks. Liu Eping studies convertible bond samples during andand find out that convertible bond announcement has significant negative effect [22].

Generally speaking, announcement effects generally convetible to the influence brought by the issue or occurrence of an economic or political event. European Financial Management, 10, Due to the relatively large uncertainty of convertoble announcement effect between stocks and bonds, different announcement effects occur in different countries and during different periods. It can be seen that convertible bonds play the role of tax shield.

A Summary of Literature: Convertible Bond Issue Announcement Effect

References [ 1 ] Asquith, P. Conflicts of Interest The authors declare no conflicts of interest. In the area of convertible bond financing announcement effect, scholars in British and American have the same research result, which argues that the issue of convertible bond has prominent positive effect on stock price; scholars in Japan and Holland draw the conclusion that convertible bond issue announcement has positive effect on company stock price.

Review of Financial Studies, 9, Studies indicate that the issue of stock financial tools will have prominent negative effect on stock prices, while the issue of bond financial tools will have positive effect on stock prices [5]. Her study shows that the most concerned factors when issuing convertible bonds include financial risk, development of company, adverse choice cost and relatively high equity concentration, while such factors as tax deduction effect are less considered.

Studies from Abroad Studies from abroad on convertible bonds has a long history and are relatively comprehensive which benefit from the mature capital market in developed capitalist countries [9]. American Journal of Industrial and Business Management6 There are a lot of papers on empirical study of convertible bond issued announcement effect and studies indicate that in most part of the market, convertible bond announcement appears negative effect in euity [11].

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Generally speaking, we choose interpret variables on the basis of issue motive theory and then set up empirical models to carry out reasonable interpret on announcement effect and draw meaningful conclusions [25]. Only in this way, can the studies be persuaded. As a consequence, there are no uniform standards and theoretical analysis frame has been built.

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Studies on convertible bonds from abroad concentrate on convertible bond pricing, convertible bond investment, convertible bond announcement effect and its optimal execution strategy [10]. Studies on the issue of convertible bonds of listed company start late in China, and only financiing few study fruits can be found.

The short-term market performance of convertible bonds refers to the direction and degree of influence that convertible bond issued announcement has on the stock price of listed company, also called announcement effect. In China, researches prove that convertible bond issue pre-arranged plan will have clear negative effect, but there are a lot of controversies over the explanation of negative effect at home which mainly result from the limitation of the amount of samples, short time scale of selected samples and different research methods, etc.

When stock price of targeted company booms, external investors in security market will convert their shares, so cash will flow into the company and issue cost will be reduced. Please enable JavaScript to view the comments powered by Disqus. Once converted, financial pressure will disappear [3]. Reform of Economic System, No. An Empirical Analysis for the Dutch Market. The Case of French Convertible Bonds. Scientific Research An Academic Publisher.

Journal of Financial Economics, 13, Journal of Financial Economics, 32, Kang and Stulz esuity return rate of announcement effect is positive which is contrary to European and American countries [18]. Because the nature of financial instruments is different, there are differences in issued announcement effect. As a consequence, capital cost convfrtible companies will be reduced [8].

In the aspect of study of convertible bond issue motive, scholars convertiblw abroad have deeper researches and put forward various hypotheses and then verify them.