Euro Convertible Bond Issuance, Conversion Price Resetting and Corporate Value –From Corporate Governance Perspective
Date Issued
2008
Date
2008
Author(s)
Wang, Ma-Ju
Abstract
Euro Convertible Bond (ECB) has been a popular financing vehicle for Taiwan Stock Exchange listed companies. Some USD 25.4 billion of ECB has been issued from January 2000 to October 2006. The abnormal stock return around the announcement date is found to be mostly negative. The negative announcement effect continued for around one week after the event date for samples after 2003, implying that ECB announcement became a bad news for the issuing companies in the post-2003 period. Negative relationship between abnormal return and company size was found before 2003, but disappeared afterwards. Special reset clause which allows the issuing company to reset downward the conversion price without lower limit, was found to have a negative impact on the abnormal returns. Smaller companies tend to incorporate special reset clause in their ECB’s more than larger companies. Their abnormal returns are positively related to the cash flow right of the controlling shareholder, consistent with the Convergence of Interest Hypothesis. Finally, company performance in terms of stock returns before the announcement of ECB issuance is found to be positively related to the abnormal returns, implying that ECB issuance of good companies is still regarded as a good news by the market.t has been well documented that negative effect prevails around the announcement date of convertible bond (CB) issuance. However, researches on the effect of conversion price (CP) downward resetting have been rare if there is any. Theoretically, downward resetting of CP raises the conversion ratio and hence induces heavier potential dilution on EPS upon conversion. On the other hand, downward resetting of CP also enhances the likelihood of conversion and therefore ease the cash flow burden of principal repayment. While the former, called dilution effect, is predicted to be negative, the later, called debt alleviation effect, is predicted to be positive.t is found in this paper, using Taiwanese data, that share prices do not react in any significant way around the announcement date of CP resetting. Share prices however do react negatively around the effective date of the resetting event, making dilution effect dominant over debt alleviation effect. After reviewing the operating performance between the CB issuing period and the CP resetting period, we find that sales growth, return on assets and operating cash flow have all been worsening off, which may explain the motivation behind the decision of CP downward resetting.ntuitively, the higher the magnitude of CP downward resetting, the more the dilution effect will be. But for companies suffering from severe cash flow shortage, the opposite effect may prevail. In other words, when CP reset by close to 20% downward(the legal limit), share prices react positively to the event, i.e., debt alleviation effect becomes dominant.
Subjects
Euro Convertible Bond(ECB)
Corporate Governance
Abnormal Return
Conversion Price
Reset Clause
Dilution Effect
Debt Alleviation Effect
Type
thesis
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