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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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Journal of Financial Economics, 13, The Case of Event Studies. Backdoor equity financing hypothesis of Stein receives universal acknowledgement and also is verified through empirical studies by many scholars [28]. 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].

Received 11 January ; accepted 15 February ; published 18 February 1. Besides, the issue price of convertible bonds is generally high and if they are converted at a higher price, covnertible bond holders will obtain more capital. In this way, conclusions drawn can be persuaded equiity meaningful.

A Summary of Literature: Convertible Bond Issue Announcement Effect

In the area of convertible convertoble 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 convergible positive effect on company stock price.

But studies on some emerging markets make it clear that the issue of convertible bond has positive effect [14].

Ke Dagang and Yuan Xianping choose companies which issued convertible bonds during January, and December, as object of study [32]. European Financial Management, 10, Journal of Multinational Financial Management, 16, 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].


Journal of Financial and Quantitative Analysis, 29, An Empirical Analysis for the Dutch Market. Studies on convertible bond announcement effect include theoretical studies and empirical studies which this paper focuses on the latter. Journal of Financial Economics, 21, This paper mainly involves convertible bond announcement effect and issued motive. For those listed companies which plan further financing, the largest advantage compared with other ways of financing is its low cost. In this way, agency conflict between shareholders and creditors to a certain extent.

Studies from Abroad In the aspect of the interpret of announcement effect, information asymmetry and financing theory are the two major theories. The mechanism of positive influence that convertible bond has on performance is as follows: Then, one of the motives of company to choose convertible bonds is to get lower external financing cost.

Studies indicate that the cost of convertible bonds refinancing for listed company in China is significantly lower than that of equity refinancing.

In this way, over-investment of managers will be prevented. This is not scientific. De Roon and Veld study stock market influence of convertible bond in Holland and find out that abnormal profit cobvertible is 0. Due to the relatively large uncertainty of the announcement effect between stocks and bonds, different announcement effects occur in different countries and during different periods.

It is the right of choice that enables convertible bond a compound derivative equkty the characteristics of euity and stocks which accredit the features of its various influences on market. Chinese Review of Financial Studies, No.


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. Convertible Bond Issue Announcement Effect. Reform of Economic System, No. Studies on convertible bonds from abroad concentrate on convertible bond pricing, convertible bond investment, convertible bond announcement effect and its optimal execution strategy [10].

As a consequence, there are no uniform standards and theoretical analysis frame has been built. Therefore, he points out blnds the original purpose of issued convertible bonds of company is to obtain equity financing through stock conversion of investors.

The contrast derives from different corporate governance. Due to the right of choice, the interest of convertible bonds is lower than that of normal bonds [2]. At the same time, unlike normal bonds that need to pay huge amount of interest and burden financial crisis that pay for huge debts, they put forward tax deduction effect on the basis of study.

He makes a comparison about the three ways of financing cost.

Convertible bonds as backdoor equity financing

Only in this way, can the studies be persuaded. Meanwhile the negative effect is mainly on the announcement day. 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. Journal of Banking and Finance, 22, The Case of French Convertible Bonds.

Journal of Finance, 50, Journal of Financial Economics, 32,