Value Effects Of Corporate Debt Issue Announcements

Empirical research of foreign and domestic studies indicates that information regarding debt issues is related to abnormal security returns to some extent. However, different studies have provided different wealth effects of convertible debt issues in Chinese market, while few studies have done for corporate debt. In this paper, I reexamine this subject by incorporating issuers’motivations and study the wealth effects of stock and bond separately.To test several motivation hypotheses based on asymmetric information theory, this paper use event study method with 469 samples from 2002 to 2013. The four empirical motivations, cash flow shortfall, capital expenditure, leverage change and debt refinancing, are calculated with accounting data from corporate audited quarterly financial reports, with first two calculated with time series regression and the other with simple accounting data. Empirical motivations represent the real financing intentions comparing with stated uses.The empirical results indicate that corporates with refinancing motivation signal their quality through the debt issuance, bringing positive market reaction on both stock and bond, which has passed the robustness test. Cash flow shortfall hypothesis is proved after considering the extreme data and market inefficiency. However, capital expenditure hypothesis is only confirmed in stock market and no evidence of stock or bond reactions for issues motivated by leverage change.Many issues are revealed by the empirical results, such as information leakage about the debt issuance, stated uses not representing the true issuing intention, market inefficiency, investors’ preference of equity securities, and so on.