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On convertible bond financing

Author: ChenAiXiang From: www.yourpaper.net Posted: 2009-04-01 14:44:00 Read:
[Abstract] article to convertible bonds for the study, the motivation of its financing, the specific circumstances of the economic consequences of China's capital market company characteristics, such as the use of the financing tool. The study concluded that, our convertible bond financing behavior with other countries, the rational component of the convertible bond issue must further enhance.
[Words] the convertible bonds motives and economic consequences of behavioral characteristics

First, the issues raised

Convertible bonds (Convertible Bonds) is one of the important ways of financing companies in the developed world, is to attract investors to meet the company's financing needs for the full application of financial engineering techniques to create a kind of derivative financial instruments. It has multiple options: the bond characteristics based on embedded option of the debt-equity swap, the terms of the convertible, the bondholders within the prescribed period to convert its bonds into a certain number of the Company's common stock, and thus can be regarded as The conversion price of the call option bondholders execution price; redemption provisions, so that the issuing company after a certain period of time and a specific time early redemption unexpired turn Coupons, and its holding period to avoid transfer vouchers may conversions that occur blocked risk reduction in interest rates and reimbursement risk opportunity, which can be regarded as the redemption price for the implementation of the price distribution company call option; given to the holders of convertible bonds by the terms of the sale back in the company's stock price can not be meet the period is expected to sell back the powers of the issuing company to provide investors with timely evasive poor outlook for the company's stock risk, which can be regarded as a sell-back price for the implementation of the price of the bond holders put option.
In our convertible bonds as another important channel for corporate finance its huge growth potential much attention. According to statistics, since the airport on February 25, 2000 and March 17, Angang two standardized convertible bonds were listed issuers, in 2002, the five listed companies to issue convertible bonds, the total issuance of $ 4.15 billion million; 16 listed companies issued convertible bonds in 2003, the total issuance amounted to 18.55 billion yuan; 12 listed companies issued convertible bonds in 2004, the total issued amounted to 20.903 billion yuan in 2005 and 2006 in the first half, due to make way for equity reform, temporarily stopped the issuance of convertible bonds. But in the second half of 2006, there are six issued convertible bonds (excluding bonds with warrants), convertible bond market development. However, relative to the broad use of convertible bond financing prospects, the research is still relatively weak. Many important theoretical and practical significance, such as why the company issued convertible bonds, convertible bond financing economic consequences, companies in China's capital market What are the characteristics of convertible bond financing behaviors are yet to be further study .

Second, the convertible bond financing motivation

From the existing literature, as early as in 1955 Pilcher that the motive of the issuance of the convertible bonds as a means of financing the study. Since then, Jensen and Mecking (1976), Green (1984) from the issue of risk transfer angle; Hoffmeister (1977) re-evaluate the motives of the 1970s, the company issued convertible bonds; Brennan and Schwartz (1988) from the The risk estimates perspective real and optimal conversion of the convertible bonds issued motivation strategy analysis; Stein (1992) from asymmetric information point of view of the managers of convertible bonds issued motivation and use of bond financing market reaction to the empirical research; Billingsley and Smith (1996), combined with the latest data on the motive of the convertible bonds issued in the early 1990s, the late 1980s were very representative survey research. To the United States from 1987 to 1993 public issue of convertible bonds of 243 companies as the objects, their company financial charge of the Company's recent issuance of convertible bond issues the answer conducted survey (get 88 that can be used respondents with 36 copies the feedback respondents, including at least one data by default, but all the rest of the statistics are useful). In addition, Mayers (1998) from the ratio of the angle of the finance and real investment options, that the Company issued convertible bonds redeemable right aims to reduce financing costs and control excessive investment; Lewis Craig (2003) proposed a set of evaluation concise framework for convertible bonds issued motivation through different cost portfolio design can reduce liabilities - interest in co-financing costs, the stock has a corresponding reaction of different design.
Comprehensive of research evidence shows that, based on the characteristics of convertible bonds financing the timing and financing costs decreased, two important motivations for convertible bond financing.
Financing timing motive
Behavior of the company's financial theory is that the company's management is rational, the stock market is often not rational to the value of the company mis-pricing, and thus have an important impact on company investment and financing behavior, the company faced a financing window of opportunity (Opportuities Window) or there are the Best Financing timing (Timing, 2001). Many studies have shown that rational judgment according to the company's management of the market environment, many companies in the stock issuance timing success. Graham and Harvey (2001) survey results show that more than 300 U.S. companies management, 2/3 of the head of corporate finance stock market financing behavior of overestimation or underestimation of the company's stock price is an important consideration. This financing timing in turn vouchers issued issue also exists, and the main issue and choose Select Company overvalued Company Price underestimate issued two different situations.
Company is overvalued when the issue related to the characteristics of convertible bonds issued at a premium. Convertible bond conversion exchange stock market value of the conversion value of the convertible bonds (Conversion Value), which is higher than the difference between the issue price of the new ordinary shares in issue is part of the premium of convertible bonds issued at a premium convertible bonds issued by international practice, but also to the interests of the existing shareholders of the company should be protected. As in the case of the face value of the bond, the relatively high conversion price implies a relatively low conversion rate, the extent of dilution of equity after conversion relatively small. Under normal circumstances, the issuing company, its future operating results of confidence, and it is expected that the greater the possibility of price rise on its future, the higher the level of premiums. At the same time, the premium is also affected by the size of the company's share price deviate from the extent of the value of the company. When the stock market overestimated the value of the company, the maturity of the bonds can be converted convert the likelihood of success and its option value also tend to be overestimated. Choose this timing issued at a premium turn the coupons, the company may be in a hurry to take large sums of money before the financial future stock fell. Because of this, in turn vouchers issued motivation survey Billingsley and Smith (1996), 83 samples 6.1% strongly agreed "because the managers believe that the issue turn coupons when the stock was overvalued"; various factors affect the Company's issued decision sort of turn coupons, 72 samples, and 3.4% of the company stock was overvalued, so we use this opportunity to turn coupons issued a high conversion premium. "Of course, this situation also its negative side. From the perspective of the option, the equity is based on the enterprise value of the call option, and corporate bonds are risk-free bond bulls and based on the enterprise value of the put option short of a combination of (Black กค F กค and M.Scholes, 1973). As a call option, only when the well-functioning of the company, the stock price rises above the agreed price, convertible bonds may have converted to stock. Thus, the decline in the value of the company, the stock price fell after the release of the turn coupons or relative to the conversion price, the conversion of power executed unlikely. The conversion failed not only will reduce the expected revenue and cash flow pressures facing debt servicing convertible bond maturity tends to cause the market value of the transferred securities investment suspect, affect the company's future financing capacity. Failure of the October 1992 issue of Shen Baoan the conversion of convertible bonds, the convertible bond market development in China and even the state over a period of time at a standstill. Thus, the offering of shares in the Company Price overestimated compared to the amount of company stock overestimate the value of the company issued convertible bonds will be less.
The Company Price underestimate the issue of the convertible bonds, mainly that it can play a role in delaying equity financing. This is because, undervalued, management of the Company believe that their companies are undervalued, immediately issued stock will increase financing costs, alternative to ordinary shares and convertible bonds issued, not only to avoid raising funding difficulties, and when to turn coupons issued company shares rose after the larger and thus the conversion is successful, the higher price indirectly delayed stock sale, the company to raise a certain amount of capital to less IPO. Here, the the pricing appropriate transfer voucher option value can be regarded as a reasonable option fee paid by the company to reduce its cost of debt financing. Convertible bonds such financing options with the pecking order theory is also consistent with the theory is that, due to asymmetric information, when investors do not know much about the value of the assets of the company, the company's share price in the market may deviate from the actual value, which the company will follow the internal funds, debt, equity order to finance new projects. In China, the number of listed companies in 2002, such as Yueyang Changxing to cancel program of issuing new shares, convertible corporate bonds instead. In turn vouchers issued motivation Billingsley and Smith (1996) survey, 83 samples, 44% strongly agreed that their companies use convertible debt financing "because the managers believe that the issue of the transfer vouchers when the stock price is undervalued" in The sample size of 86, 83.7% strongly agree "is expected to turn coupons will be converted, thus the issue turn coupons as 'deferred equity' financing motive. Turn coupons of various factors affecting the Company issued the decision-making level of sort of 76 samples, 15.7% of the company that "the stock is undervalued, so we can not take advantage of the equity financing" is the greatest influence on the factors, 22.5% think " equity issued by the Company to postpone "the greatest influence. Turn coupons issued environmental questionnaire and feedback answer analysis results show that 46.4% of the company that "in retrospect, the company's stock price is undervalued in turn vouchers issued before and after." In this case, the convertible bond financing is known as a deferred equity financing, it is the company's current or future earnings per ordinary share has a role to reduce the degree of dilution.
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