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Asymmetric information and conversion price reset policy: The case of Chinese convertible debt

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  • Martin, Darius
  • Qiu, Junfeng
  • Zhang, Yongli

Abstract

This paper studies a firm's decision to reset the conversion price of convertible debt when the manager has asymmetric private information. Reset provisions are present uniquely in East Asian issues of convertible debt, and in practice allow a firm's management to lower the conversion price. We develop a signalling model in which a conversion price reset conveys unfavorable private information about the firm. This is because a firm will reset only if it cannot afford debt repayment. We conduct an event study with data on the equity prices of Chinese convertible bond issuing firms. We argue that conversion price resets exhibit negative announcement effects.

Suggested Citation

  • Martin, Darius & Qiu, Junfeng & Zhang, Yongli, 2015. "Asymmetric information and conversion price reset policy: The case of Chinese convertible debt," The Journal of Economic Asymmetries, Elsevier, vol. 12(2), pages 133-141.
  • Handle: RePEc:eee:joecas:v:12:y:2015:i:2:p:133-141
    DOI: 10.1016/j.jeca.2015.05.002
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    References listed on IDEAS

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    1. Stein, Jeremy C., 1992. "Convertible bonds as backdoor equity financing," Journal of Financial Economics, Elsevier, vol. 32(1), pages 3-21, August.
    2. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    3. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
    4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
    5. Mikkelson, Wayne H., 1981. "Convertible calls and security returns," Journal of Financial Economics, Elsevier, vol. 9(3), pages 237-264, September.
    6. Mazzeo, Michael A & Moore, William T, 1992. "Liquidity Costs and Stock Price Response to Convertible Security Calls," The Journal of Business, University of Chicago Press, vol. 65(3), pages 353-369, July.
    7. Harris, Milton & Raviv, Artur, 1985. " A Sequential Signalling Model of Convertible Debt Call Policy," Journal of Finance, American Finance Association, vol. 40(5), pages 1263-1281, December.
    8. Asquith, Paul, 1995. " Convertible Bonds Are Not Called Late," Journal of Finance, American Finance Association, vol. 50(4), pages 1275-1289, September.
    9. Qiu, Junfeng & Zhang, Yongli, 2013. "Convertible bonds with resettable conversion prices," Economic Modelling, Elsevier, vol. 31(C), pages 198-205.
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    More about this item

    Keywords

    Resettable convertible bonds; Conversion price resets; Asymmetric information; Announcement effects;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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