A Study On Effects Of How Convertible Bonds Improve The Corporate Governance Mechanisms

Convertible bond, which is a financial creative instrument, now is well known by people and becomes one of the most important ways of re-financing. People have already known and studied the financing function of convertible bond. However, most issuers in China don't well recognize the effects of how convertible bond improve the corporate governance mechanisms, and they simply view convertible bond as a cheap way for financing, or think of it as a retarded mean of stock financing. In fact, convertible bond is not only an important re-financing instrument, but also has close relationship with corporate governance.This paper utilizes positive analysis and normative analysis methods to analyze the governance mechanisms of convertible bond from convertible bond's features and clauses, based on the principle-agent theory and incomplete contract theory. Therefore, this paper first summarizes the definition of corporate governance and two important theories related to corporate governance: the principle-agent theory and incomplete contract theory. Then, this paper summarizes the former studies on the governance function related to convertible bond.Second, this paper, based on the principle-agent theory, analyses the genesis of agency cost and explain the governance mechanisms of convertible bond's features and clauses, which have the special function to reduce the agency cost. In order to verify the conclusion this paper gets, I first choose 31 listed companies as our subjects, which have successfully issued convertible bonds from the year 2002 to 2004. Then I study the agency cost before and after the convertible bond issued, and finally draw a conclusion that the agency cost is less after the convertible bond issued. In order to show the special function of convertible bond on reducing agency cost, I take "Yangguang convertible bond" as a case. And the case also shows that the agency cost is less after the convertible bond issued.Third, this paper suggests that convertible bond could be used in stock incentive institution and also analyses the feasibility and operability. Based on this, this paper creates a mathematic theory model to analyze the incentive function of convertible bond. Moreover, I discuss how to enhance this incentive function.Finally, this paper, based on incomplete contract theory, introduces the financing theory and contingent governance theory under incomplete contract theory. Then, I create a financing theory model ,which is based on convertible bond, to analyze the convertible bond's contingent governance function.The study of this paper show that: (1) convertible bond has the special function of reducing the agency cost, and related empirical study also support this conclusion;(2)We suggest that the company can bring convertible bond into the stock incentive institution. By doing this can solve the problem of the origin of stocks, can make the long-term interests of owners and managers tend to be the same, can stimulate managers better to take long-term actions, which are good for company's development, can also constrain managers' short-term actions, which are bad for company's long-term development.(3) Convertible bond has contingent governance function, which can configure the control rights effectively. That is to say, when the company goes well, the holders of convertible bond will transfer convertible bonds to stocks, they get cash flow rights and won't execute control rights. When the company's performance is bad, the holders of convertible bonds won't transfer convertible bonds to stocks, they will execute control rights.