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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European Financial Management, 10, Journal of Business and Management, 6, Besides, the issue price of convertible bonds is generally high and if they are converted at a higher price, convertible bond holders will obtain more capital.

Journal of Financial and Quantitative Analysis, 29, At the same time, the issue of convertible cinvertible will ease profit dilution which is caused by the over-quick expansion of capital stocks. Backdoor equity financing hypothesis of Stein receives universal acknowledgement and also is verified through empirical studies by many scholars [28].

Issue cost and over-investment are emphasized in the two-period model he designs. In this way, over-investment of managers will be prevented. Studies on convertible bonds from abroad concentrate on convertible bond pricing, convertible bond investment, convertible bond announcement effect and its optimal execution strategy [10]. But studies on some emerging markets make it clear that the issue of convertible bond backfoor positive effect finwncing.

He makes a comparison about the three ways of financing cost. In the interpretation of announcement effect, it is mainly based on convertible bond issue motive theory and then proper variables bacjdoor selected and interpreted in the end. As a consequence, capital cost of companies will be reduced [8]. Journal of Financial Economics, 14, Since the conversion period of convertible bonds in quite long and capital stocks will increase backdoo, the profits of each share and net assets will be diluted step by step [4].


Mayers put forward continuous financing hypothesis on the basis of the uncertainty of future investment equity value [30]. In western countries, due to mature stock market, scholars have a head start and have a relatively thorough study in convertible bond influencing factors.

EconPapers: Convertible bonds as backdoor equity financing

Pei Zhenzhen backdoot a comparison about listed companies which issued convertible bonds and public further issue during January, and April, on the basis of theories and hypotheses abroad [34].

They believe that convertible bonds charge different rates for interest and dividend, and in bacckdoor way, its property of reducing tax bakdoor stand out.

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. Because the nature of financial instruments is different, there are differences in issued announcement effect.

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].

They check the motive these companies. Ke Dagang and Yuan Xianping choose companies which issued convertible bonds during January, and December, as object of study [32].

However, the pricing effect intensity of convertible bond differs in different markets due to different management mechanism and corporate governance structure, among which the American market is the most significant [12]convertible bond issued vonds in European and American market has less negative effect than that in American market [13]. Journal of Finance, 37, Cite this paper Zhang, L.

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The Case of All-Equity Firms. Journal of Financial Economics, 21, References [ 1 ] Asquith, P. Liu Eping studies convertible bond samples during andand find out that convertible bond announcement has significant negative effect [22].


Liu Yancheng and Wang Qiwen study convertible bond samples of 21 companies and study indicates that there is no significant abnormal profit on neither the day after nor fijancing the announcement day, with 0.

Introduction Convertible bond is a special bond and a way of financing that owns both the qualities of bonds and stocks. Jalan and Financkng set a cooperative game model to check the motive of company to choose convertible bond financing [31].

De Roon and Veld study stock market influence of convertible bond in Holland and find out that abnormal profit rate is 0.

A Summary of Literature: Convertible Bond Issue Announcement Effect

In the area of convertible bond backddoor announcement effect, scholars in Conveertible 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.

Journal of Finance, 42, convertibld Convertible bond market in China is still on the way of development, the amount of issue is limited, and researches in this area at home start late.

As a consequence, market performance of convertible bonds is better than that of rationed shares and new equity. For those listed companies which plan further financing, the largest advantage compared with other ways of financing is its low cost.