Announcement Effect And Impact On Stock Price Volatility Of Convertible Bond Issuance In China’s Market

Generally speaking, China has a different preference from the developed countries in terms of how to finance their business. Companies in developed countries frequently rely on issuing corporate bonds and convertible bonds, while the listed companies at the A shares market put much more focus on the equity financing. However, the risks of participating in the capital market have been considered to be higher especially after the financial crisis occurred in 2008. Hence, an increasing number of listed companies and investors is turning their eyes onto financing and investing with convertible bonds. China has relatively short history and slow pace of developing the market for the convertible bond. Between the years of 2001 to 2013, there were approximately 100 convertible bonds issued in the A shares market. Convertible bond, having the characteristics of both bonds and stocks, is a special financing alternative. Academic studies show that the share prices can somehow react to the issuance of convertible bonds. Meanwhile, being convertible is likely to impact the stock price volatility.The purpose of this paper is to provide recommendations in the decision-making of via which channel for companies to go public, to explore the investment opportunities and to discuss the healthy development of Chinese capital market. In order to achieve that, all issued convertible bonds in China from the year of 2001 were examined and 81 of them coming from 68 different companies were selected as the sample. Then, the announcement effect of convertible bonds in the stock market for A shares and stock price volatility was analyzed and discussed.This paper adopted the methodology of event study, calculating the share price and index rate of change. Taking the announcement day as the base, the announcement effects within 5 transaction days before and after were monitored and studied. According to the empirical study results, different window periods show different announcement effects. Positive announcement effect takes place prior to and at the announcement day with being at the peak one day before and after. In contrast, negative abnormal return takes place 2 days after the announcement day, which would set off the previous positive abnormal return and hence would weaken the announcement effect. This trend has been becoming more significant and salient after the 2008 financial crisis.Furthermore, based on the market model revised with GARCH model, the samples were evaluated on the stock price volatility during the following three periods:6 months prior to the announcement day,6 months after the announcement day and 7 to 12 months after the announcement day. Using the Wilcoxon signed-rank test, the data differences between the above 3 controlling sets were spotted. Through investigating the identified differences, the conclusion was generated that the stock price volatility of listed companies can be larger either after the announcement day or with the ability to be converted. The peak of the volatility was observed during both the periods of 6 months prior to the announcement day and 7 to 12 months after the announcement day.