Why firms issue convertible bonds - A test of the sequential-financing hypothesis
|關鍵字:||可轉換公司債;事件研究法;GARCH(1,1);橫斷面迴歸;異常報酬;Convertible Bond;Event Study;GARCH(1,1);Cross-Sectional Regressions;Abnormal Return|
The objective of this thesis is to re-examine the sequential-financing hypothesis by employing data of convertible bond issuances from firms listed at the Taiwan Stock Exchange from 1994 to 2003. The sequential-financing hypothesis, proposed by Myers, argues that convertible debt financing is motivated by a desire to minimize security issue costs and mitigate the Jensen’s overinvestment problem. There are three major topics. First, we use event-study methodology to explore stock price responses to the announcements of convertible debt offerings. Next, we use GARCH(1,1) specification to examine if the volatility of stock returns is changed due to the announcements. Third, we run cross-sectional regressions to investigate the factors which might influence the announcement effects and provide some evidence for the sequential-financing hypothesis. We find that announcements of convertible debt offerings are, on average, associated with significantly negative abnormal returns. In addition, the pre-announcement volatility of stock returns is not significantly different from the post-announcement volatility. The results of the cross-sectional regressions are as follows. 1.The coefficient for the focus variable is insignificant, so our evidence does not support the sequential-financing hypothesis. 2.The coefficient for the long-term debt ratio is positive and significant at the 10% level. This result is consistent with the sequential-financing hypothesis as well as Stein’s backdoor-equity hypothesis. 3.The coefficient for the firm size variable is negative and significant at the 5% level. This evidence is consistent with not only the sequential-financing hypothesis but also the view of mitigating the informational asymmetry problem. 4.The coefficient for the contamination dummy is significant at the 10% level. This suggests that the contaminated events during the announcement period affect the announcement effects. 5.The relative issue size is positive and significant at the 10% level. This implies that the lager the relative size of issue, the stronger the strength of a security's signal to the market. In summary, we show that two characteristics of our sample firms are consistent with the sequential-financing hypothesis, but they are also consistent with the view of mitigating the informational asymmetry problem. However, our evidence on the focus variable does not support the sequential-financing hypothesis. Therefore, our evidence overall shows mixed support for the sequential-financing hypothesis in explaining the motivation of using convertible debt financing for Taiwanese firms.