Are Convertible Bonds Called Late in China?

Abstract

Abstract: This study investigates call delay anomalies in Chinese convertible bond market. We develop a new measure that incorporates the unique soft call provisions prevalent in China. Our empirical analysis reveals that approximately 38.6% of bonds exhibit calls delays, with a mean (median) delay duration of 33 (70) days, which is evidently longer than observed in the U.S. market. We attribute the divergence in call delay to the structural differences in the convertible bond covenant design between the two markets. Our findings demonstrate a significant positive relationship between issuers' financing constraints and the extent of call delay. We also find that the call frequency restrictions have a substantial impact on call decisions. Bonds with call frequency restrictions exhibit significantly shorter call delays compared to those without such restrictions.

Keywords: Key words: convertible bond, call delay, financing constraint；covenant design