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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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    More about this item

    Keywords

    Resettable convertible bonds; Conversion price resets; Asymmetric information; Announcement effects;
    All these keywords.

    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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