A Study On The Factors Affecting The Discount Of China 's Convertible Bonds

Convertible bond is a bond which gives the holder an option to convert the bond to the company’s stock at certain times in the future. It combines the features of bonds and stocks. China’s convertible bond market has developed quickly since the beginning of the new millennium, and convertible bond is playing a more and more important role as a financing method.This thesis reviews relevant researches on convertible bond pricing and security underpricing. For empirical analysis we include all the76convertible bonds issued in China from2000to March2011in our sample. We apply the Black-Scholes model to calculate the theoretical prices of the convertible bonds, and find that the convertible bonds are underpriced by16%on average. Then we perform regression analyses to explore the roles of five potential determinants of underpricing. Based on the empirical results, we argue that the issue size has a significant and negative relationship with convertible bond at-issue discount, while discount is positively and significantly related to firm’s debt ratio. However, we do not find strong evidence to support the illiquidity hypothesis. Nor do we observe significant relationships between at-issue discount and maturity or rating.