The effect of disclosure for issuing convertible bonds on Chinese firms listed on the Shanghai and Shenzhen stock market

Convertible bonds have become an important financing vehicle in many countries (i.e., United States, Europe, and Japan) and in local financial markets because they have both stock profitability and bond stability. Many listed and unlisted enterprises have issued convertible bonds inside and outside China. Accordingly, related laws and regulations have been legislated since convertible bonds were first issued in China in August 1991. This study conducts an empirical analysis to understand whether previous theories on the announcement effect of convertible bond issuance in foreign countries are still effective in the Chinese capital market. The cumulative average residual of the stock prices of 83 sampled enterprises, which issued convertible bonds among those listed on Chinese stock exchange from 2002 to the end of 2013, was measured in a case study. The analysis shows the following: First, the announcement effect of convertible bond issuance in China was observed as a significant (+) value to stock price. The cumulative average residual of the whole sample period (i.e., (-1, 1), (-5, 1), (-30, 1)) showed a significant (+) value at 1%. Second, an analysis was conducted on whether significant differences were present in the average residual among small samples that were classified according to issuing enterprises' legal characteristics (i.e., state-owned enterprise and private enterprise), systematic characteristics (i.e., before and after stock share division reform), and market characteristics (i.e., Shanghai Stock Exchange and Shenzhen Stock Exchange). Results showed that the announcement effect of convertible bond issuance was found more in state-owned enterprises than in private ones. The stock price cumulative average residual had a more significant (+) value after the stock share division reform than before it. No notable difference was found between stock exchanges. Third, in the regression analysis that took stock price cumulative average residual as a dependent variable, enterprises' growth perspective positively and significantly influenced the announcement of convertible bond issue. That is, as enterprises' growth perspective is high, the possibility of increasing finances by issuing convertible bonds is greater and can positively influence stock price. Moreover, the stock price cumulative average residual was not significantly influenced by the size of enterprises, debt ratio, propensity to dividend, issuing size, and relative issuing size. Therefore, the significance of convertible bond issuance increases with the improvement of the system. Problems that may arise at the time of private enterprises' convertible bond issuance are decreased, and even more high-tech growing enterprises are encouraged to issue convertible bond.