Convertible bonds and corporate innovation: incentive or resistance?

This study examines how convertible bond issuance affects corporate innovation using a panel of Chinese listed firms from 2006 to 2023. The findings indicate that convertible bonds significantly enhance firms’ innovation output, as reflected in patenting activities. Mechanism analysis indicates that this effect operates through both internal capability enhancement and external governance mechanisms. Specifically, convertible bonds increase R&D investment and facilitate digital transformation, while simultaneously improving analyst attention and alleviating financing constraints. The innovation-enhancing effect is more pronounced among firms lacking directors’ and officers’ liability insurance and those with lower institutional ownership, suggesting that convertible bonds partially substitute for weak external monitoring. Further analysis indicates that for convertible bonds with a shorter weighted average conversion duration, the innovation-enhancing effect is more pronounced. Moreover, convertible bonds not only increase innovation output but also enhance its efficiency and quality, thus serving as a significant catalyst for corporate innovation.