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“Pecking order” of Chinese capital market: Effects of convertible bonds’ issue announcements |
| HAN Liyan1, MOU Hui1, XIE Duo1, CHEN Zhi′an2 |
| 1.School of Economics and Management, Beihang University, Beijing 100083, China; 2.School of Banking and Finance, The University of New South Wales, Sydney 2052, Australia; |
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Abstract This paper empirically shows that the announcements of the issue of convertible bonds (CBs) by Chinese firms have significant negative effects on shareholders wealth. We find that when the samples are partitioned by equity component negative market responses towards the announcements of issuing equity-like CBs are more than that of debt-like CBs. This finding is different from the pecking order hypothesis of Myers and Majluf (1984). By analyzing the firm characteristics of convertible bond issuers, we find that the wealth effects are negatively related to equity component, firm size and issue size of convertible bonds, and are positively related to financial leverage, liquidity structure of equity, book value of non-liquidity equity and market-to-book ratio. The underlying reason of equity finance taking precedence of bond finance in Chinese capital market can be attributed the to special two-system-ownership structure and corporate governance of Chinese listed companies.
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Issue Date: 05 June 2007
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