The exchangeable corporate bonds have been so popular since entering China. Because the time is short, there are few empirical researches on the announcement effect of exchangeable bonds in China. Based on the event study method, the article carries the empirical study on the announcement effect of the exchangeable bonds which their target company’s stocks are issued in China's A-share stock market. The results show that there is a negative influence on the market when the announcement announced. On the six days before the event day, the abnormal return is significantly positive, while it’s negative on most of the other days, and is not significant. At the same time, the cumulative abnormal returns of each window period are not significant. The Shanghai A-share stock market may exist news leaked in advance, but once the news is disclosed, the market can digest the message soon, the stock price can return stable in a short time, so it is satisfied with the effective market. The validity of Shanghai A-share market will also need further enhance. It needs to speed up the improvement of the financial system, further refine trading rules, create rich financial derivatives for people to use, perfect the legal laws and regulations, focus on the regulations, and standardize China’s financial market, so it can develop toward a good direction.
Exchangeable bonds (EB), refers to the shares holders issue corporate bonds, through mortgaging their holdings of stocks to the trustee. The holders of the bonds can with holding bonds for the mortgaged equity of listed companies in a certain period of time, according to the contract conditions.
According to the different terms and conditions, exchangeable bonds can be divided into five categories, namely ordinary exchangeable bonds, bonus compensation type of exchangeable bonds, waiting type of exchangeable bonds, a basket of stocks exchangeable bonds and the exchangeable bonds which can pay at any time. Exchangeable bonds prospectus covers a variety of factors, including face value, coupon rate and maturity, the exchange price, exchange rate, exchange value and exchange period and so on. Some additional terms were agreed in the contract of exchangeable bonds, such as the redemption clauses, it refers to before the bond maturity, the issuer has the right to redeem exchangeable bonds early with the price according to the terms of agreement, and redemption price is generally higher than the face value of the exchangeable bonds. Put- backs terms, referring to safeguard clause, is also the lowest return exchangeable bonds. Revised terms refer to the issuer active downward revisions in share prices, under certain conditions. In addition, the exchangeable bonds also have the nature of stocks and bonds. It can not only bring the fixed income, but also can convert debt into equity. It is the bond investors’ important channel to maintain flexibility and share the stock market returns.
For a long time, exchangeable bonds are the tools of capital markets in developed countries. The characteristics of exchangeable bonds are used by the CSRC to deal with all kinds of sizes financing needs, which are not belong to the equity holdings. Learn from the development of exchangeable bonds in European and American, CSRC studied the issuer, the underlying stocks, the issuing scale and the related terms. CSRC formulated and published the rule issuing exchangeable corporate bonds interim provisions for the shareholders of listed companies. China’s exchangeable bonds issued for the first time in 2008, and the real development begins from the issue of the exchangeable bonds “13 Fuxin Debt” in the October 2013.
With the improvement of relevant laws and regulations, the quantity, type and scale of exchangeable bonds are constantly growing. In the year of 2013 to 2016, it has issued 66, 70 billion yuan, and become one of the most high-profile investment products. So far, the exchangeable bonds in China is no longer just for the underweight financing, but was given a new mission and new function, it is for revitalizing the major shareholders in equity capital. As a new financing tool, a new financial derivative and also a kind of new varieties for fixed-income investments, the development of exchangeable bonds is getting better and better.
Announcement effect refers to the release or happening of an economic or political events, which will affect another event. Announcement effect of exchangeable bonds refers to the disclosure of the announcement can bring fluctuation to stock prices for listed companies. The study is of great significance. Companies need to assess the influence of issuing exchangeable bonds or other financing tools on the fluctuation of stock price. Choose the most appropriate financing strategy in accordance with the long-term or short-term effect. While, investors should also grasp the exchangeable bonds’ announcement effect, and make the optimal choice of investment tools.
Announcement effect on the corporate debt can be divided into two aspects, the announcement effect of corporate debt with no choice and the announcement effect of corporate debt with choice.
Easterbrook (1984) [
Abhyankar and Dunning (1999) [
In China, Wang, H. Y. and Xia, X. P. (2004) [
Because China’s exchangeable bond market has just started, Scholars in China research on China’s exchangeable bonds only stay at theory stage. There are only researches on its pricing, term designing and legal system, accept the empirical study of exchangeable bonds’ announcement effect. In order to fill the blank in this field, this paper combined with China’s specific conditions and based on numerous domestic and overseas researches, used empirical study method to reach the reasonable explanations.
1) The Definition of Events
Defines t = 0 as event day, (−10, 20) as the event window, (−270, −10) as the estimation window in order to estimate the parameters. At the same time, select the window period of (−1, 1), (−1, 0), (0, 1), (−2, 2), (−2, 0), (0, 2) for comparison, studies the announcement effect of issuing exchangeable bonds.
2) Definitions of Expected Return and Abnormal Return
a) Expected Return
The expected return refers to the estimated stock return of T1 to T2. Use ERit to represent the excepted return of stock i in time t. Defines L = T 1 − T 0 , L as the length of estimation window.
This paper makes an empirical analysis by using the market model. In the market model, assumes that there is a linear relationship between the expected return and the market return at the same time. So:
E R i t = α i + β i R m t (1)
Parameter estimation in market model:
When using the market model, estimate parameters to get the expected return by OLS. Within the appropriate estimation window:
R i t = α i + β i R m t + ε i t , t = T 0 + 1 , ⋯ , T 1 (2)
To get the expected return within event window, assume that the value of α ^ i and β ^ i are stable before and after the event occurs.
R ^ i t * = α ^ t + β ^ t R m t * , t * = T 1 + 1 , T 1 + 2 , ⋯ , T 2 (3)
b) Abnormal Return
Abnormal return is the actual return minus the expected return in stock market after the event occurs. Use ARit as the abnormal return of stock i in time t.
A R i t = R i t − ( α i + β i R m t ) (4)
3) Hypothesis Test for Abnormal Return and Cumulative Abnormal Return
a) Hypothesis Test for Abnormal Return
Test the abnormal return in the market model, the abnormal return within the event window is:
A R i t * = R i t * − R ^ i t * (5)
Standardize the abnormal return:
A R ^ i t * = A R i t * var ( A R i t * ) (6)
H 0 : A R i t * = 0 . A R ^ i t * obeys the t distribution with the degrees of freedom for L-2. With the increase of degree of freedom, t distribution is asymptotic to normal distribution, so A R ^ i t * obeys normal distribution when the estimate window is long.
Defines the statistic:
J 1 = ( N ( L − 2 ) L − 4 ) 1 2 1 N ∑ i = 1 N A R ^ i t * (7)
Under null hypothesis conditions, statistic J1 obeys the standard normal distribution.
b) Cumulative Abnormal Return
Assume T 1 + 1 < t 1 < t 2 < T 2 , calculate the cumulative abnormal return of com-
pany i within the period [ t 1 , t 2 ] :
C A R i ( t 1 , t 2 ) = ∑ t * = t 1 t 2 A R i t * (8)
The average cumulative abnormal return is:
C A R ( t 1 , t 2 ) ¯ = 1 N ∑ i = 1 N C A R i ( t 1 , t 2 ) (9)
H 0 : C A R i ( t 1 , t 2 ) = 0 . When there is no correlation between each period of
average abnormal returns, combining with the equation A R ^ i t * = A R i t * var ( A R i t * ) ,
get the statistic by the central-limit theorem:
J 2 = C A R ( t 1 , t 2 ) ¯ t 2 − t 1 + 1 ( N ( L − 2 ) L − 4 ) 1 2 = 1 t 2 − t 1 + 1 ∑ i = t 1 t 2 1 N ∑ i = 1 N S i t * (10)
Under null hypothesis conditions, statistic J2 obeys the standard normal distribution.
This article selected all A-share companies listed in Shanghai Stock Exchange which had announcement of issuing exchangeable bond from August 30, 2012 to January 30, 2017.
In order to ensure the accuracy of the empirical results, this article follows the followings when choosing the samples:
1) This article selected the listed companies of Shanghai A-share market. B shares and H shares were eliminated from the scope of research.
2) Remove listed companies in financial sector.
3) The sample were clean samples, excluding listed companies issued the annual financial report, quarterly financial report, the material assets reorganization, new financing plan and other major events before and after 5 days they announced to issue exchangeable bond.
4) Remove listed companies which were suspended for more than five trading days.
After filtering, this paper finally identified 17 A-share listed companies in Shanghai Stock Exchange, selected [−270, 20] as the window period. Use VBA macro and Eviews to process data.
The company list and the announcement dates are from Wind Database. The stock returns are from the CSMAR Database.
There are two markets returns: one is the total market capitalization weighted rate of return, the other is the current market capitalization weighted rate of return.
The
The Shanghai A-share (Market Return 1) | The Shanghai A-share (Market Return 2) | |
---|---|---|
Mean | 0.00019 | 0.00023 |
Median | 0.00121 | 0.00149 |
Maximum | 0.07026 | 0.07291 |
Minimum | −0.09228 | −0.09254 |
Std. Dev. | 0.02010 | 0.02057 |
Skewness | −1.03201 | −1.01755 |
Kurtosis | 6.98768 | 6.78884 |
Jarque-Bera | 4155.85000 | 3812.67900 |
Probability | 0.00000 | 0.00000 |
Sum | 0.94466 | 1.15932 |
Sum Sq. Dev. | 1.99741 | 2.09311 |
Observations | 4947 | 4947 |
than zero, which indicated that the China’s stock market over the past few years was a rising trend. There are a lot of restricted stocks in China’s stock market, only tradable shares are greatly influenced by stock price, so this article used the daily current market capitalization weighted rate of return as the return on the market.
The empirical results are obtained as
In the window period of (−10, 20), ten days’ ARs of Shanghai A-share market are greater than zero, and all the others are negative. In the first ten days, there are six days’ ARs < 0. And in the last 20 days, there are only six days’ ARs > 0. This suggests that, during this period, the reaction of market to the announcement of exchangeable bonds is negative. Under 5% significance level, only the −6th day shows that the AR is significant positive. And the AR is significantly greater than zero in the six days before announcement means that there may exist information leaked in advance before the announcement of exchangeable bonds in China’s Shanghai A-share market.
Time | AR | Statistics | P-value | Significant (Under the 5% level) |
---|---|---|---|---|
−10 | 0.00469 | 0.827754 | 0.203905 | |
−9 | −0.00458 | −0.764378 | 0.222321 | |
−8 | 0.00250 | 0.807052 | 0.209818 | |
−7 | −0.00406 | −0.742049 | 0.229029 | |
−6 | 0.01251 | 2.380389 | 0.008647 | Significant |
−5 | −0.00214 | −0.240471 | 0.404982 | |
−4 | −0.00932 | −1.344614 | 0.089375 | |
−3 | −0.00531 | −0.852092 | 0.197082 | |
−2 | −0.00825 | −1.561950 | 0.059150 | |
−1 | 0.00057 | 0.126271 | 0.449759 | |
0 | −0.00118 | −0.330994 | 0.370325 | |
1 | −0.00143 | −0.220795 | 0.412626 | |
2 | 0.00560 | 0.787823 | 0.215400 | |
3 | −0.00421 | −0.699894 | 0.241997 | |
4 | −0.00368 | −0.632393 | 0.263565 | |
5 | −0.00127 | −0.273136 | 0.392375 | |
6 | −0.00290 | −0.199845 | 0.420801 | |
7 | −0.00388 | −0.306952 | 0.379440 | |
8 | −0.00081 | −0.132878 | 0.447145 | |
9 | −0.00441 | −0.789922 | 0.214787 | |
10 | −0.00225 | −0.514020 | 0.303619 | |
11 | −0.00309 | −0.558226 | 0.288345 | |
12 | 0.00352 | 0.700198 | 0.241902 | |
13 | −0.00881 | −1.364312 | 0.086235 | |
14 | 0.00096 | 0.111570 | 0.455582 | |
15 | −0.00445 | −1.010870 | 0.156039 | |
16 | 0.00401 | 0.788805 | 0.215113 | |
17 | 0.00171 | 0.525697 | 0.299549 | |
18 | −0.00118 | −0.154403 | 0.438646 | |
19 | −0.00671 | −1.492157 | 0.067829 | |
20 | 0.00272 | 0.361665 | 0.358801 |
From the perspective of the CARs, at (−10, 20) window period, the CARs of A-share stocks in SSE are not significant. That is, the effect of announcement has little effect on the stock market in this period. It shows that the Shanghai A-share market efficiency is higher, and the effect of issuing announcement will not cause too much changes on the stock price. The market can digest the publication information quickly.
The above
Event Window | CAR | Statistics | P-value | Significant (Under the 5% level) |
---|---|---|---|---|
(−10, 20) | −0.04513 | −0.03355 | 0.486618 | Non-significant |
0 | −0.00118 | −0.00487 | 0.498055 | Non-significant |
(−1, 0) | −0.00061 | −0.00179 | 0.499288 | Non-significant |
(0, 1) | −0.00261 | −0.00765 | 0.49695 | Non-significant |
(−1, 1) | −0.00204 | −0.00489 | 0.49805 | Non-significant |
(−2, 0) | −0.00886 | −0.02118 | 0.491551 | Non-significant |
(0, 2) | 0.00298 | 0.00713 | 0.497156 | Non-significant |
(−2, 2) | −0.00470 | −0.0087 | 0.496528 | Non-significant |
(−10, 20) | 0 | (−1, 0) | (0, 1) | (−1, 1) | (−2, 0) | (0, 2) | (−2, 2) | |
---|---|---|---|---|---|---|---|---|
Mean | −0.04513 | −0.00118 | −0.00061 | −0.00261 | −0.00204 | −0.00886 | 0.00298 | −0.00470 |
Std. Error | 0.02648 | 0.00357 | 0.00554 | 0.00410 | 0.00588 | 0.00725 | 0.00611 | 0.00855 |
Median | −0.04456 | −0.00182 | −0.00362 | −0.00078 | −0.00309 | −0.00603 | 0.00034 | −0.00285 |
Mode | −0.04456 | −0.00182 | 0.01569 | 0.00166 | 0.01918 | 0.00662 | 0.01945 | 0.02789 |
Std. Dev. | 0.10918 | 0.01472 | 0.02284 | 0.01691 | 0.02425 | 0.02990 | 0.02519 | 0.03526 |
Variance | 0.01192 | 0.00022 | 0.00052 | 0.00029 | 0.00059 | 0.00089 | 0.00063 | 0.00124 |
Kurtosis | 0.27726 | 2.48587 | 1.48823 | 3.39942 | 2.58359 | 0.58306 | −0.23531 | −0.12607 |
Skewness | −0.06280 | 0.88279 | 0.80850 | 0.83260 | 1.08538 | 0.00861 | 0.09077 | 0.12941 |
Minimum | −0.25801 | −0.02803 | −0.03401 | −0.03282 | −0.03598 | −0.05965 | −0.04196 | −0.07000 |
Maximum | 0.15475 | 0.03804 | 0.05852 | 0.04442 | 0.06490 | 0.05805 | 0.04408 | 0.06272 |
Summation | −0.76722 | −0.02002 | −0.01037 | −0.04441 | −0.03476 | −0.15068 | 0.05072 | −0.07994 |
Observations | 17 | 17 | 17 | 17 | 17 | 17 | 17 | 17 |
that the reaction of the market for the Shanghai A-share listed companies issuing exchangeable bonds announcement is negative. The CARs are not significant in the window period, which suggest that the impact of issuing announcement on the market is not big.
The emergence and application of China’s exchangeable bonds is greatly later than abroad. Considering from the external environment, China is in the process of reforming and opening up. The openness and efficiency of the capital market is gradually enhanced. At first, the exchangeable bonds are hard to enter the market in China. Now, it has developed to release several exchangeable bonds every month, only three and a half years after its first release. To meet the financing needs of different issuers, the exchangeable bonds have spawned many types in China’s market. We should not only see the advance of China’s capital market, but also find its disadvantages. Discovered by empirical results in this paper, the Shanghai A-share market is efficient. The hypothesis that the ARs = 0 has passed after the announcement of exchangeable bonds. It shows that the announcement effect on the two markets on the event day is not significant. But the Shanghai A-share market’s ARs is significantly positive in the −6th day. However, it soon subsides, with no lag reaction later. In the efficient market, the market will immediately begin to digest and absorb the news once they have been issued. So, the time of disclose issuing announcement will only affect the stock at that point, and the stock abnormal returns are only related to the news. Studies on both China and abroad also satisfy the weak validity of stock market, the price includes all historical information, and we cannot get excess returns through technical analysis.
Based on the analysis above, this article puts forward the following suggestions. First of all, for the Shanghai A-share market, we need to further improve its effectiveness, further refine the trading rules and create more financial derivatives for the demander. In addition, we also need to develop and optimize the related laws and regulations. Due to the new characteristics of modern finance, perhaps the smallest butterfly flaps its wings could also bring unexpected consequences. Therefore, the Chinese government needs to strengthen the supervision, making the financial market standardization and developing towards the good direction.
Wang, X. (2017) The Announcement Effect of Exchangeable Bonds in China. Technology and Investment, 8, 96-107. https://doi.org/10.4236/ti.2017.82008