Effect of the Issuance of Convertible Bonds on the Company’s Agency Costs

Yu Pan^*

School of Economics, Jinan University, Guangzhou, China.

DOI: 10.4236/jss.2015.311022                

Abstract

The separation of ownership rights and management rights on shares of a Joint-stock company leads to agency conflicts between shareholders and managers. With the separation of ownership and management of financing funds making the interests of shareholders contradict the interests of its creditors, the company’s agency costs come into being as a result. Through an empirical research on agency costs of 79 non-financial listed companies who issued convertible bonds during the year 2002-2013 in China, whether the issuance of the convertible bond is beneficial to reduce agency cost of listed companies is examined. The empirical results show that the issuance of convertible bonds contributes to the reduction of agency costs, which supports the assumption concluded from the theoretical researches conducted by foreign researchers that convertible bonds can reduce agency costs in some extent.

Keywords

Convertible Bonds, Agency Costs, Listed Companies

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	Mayers, D. (1998) Why Firms Issue Convertible Bonds: The Matching of Financial and Real Investment Options. Journal of Financial Economics, 47, 83-102. http://dx.doi.org/10.1016/S0304-405X(97)00038-X
[2]	Schmidt, K.M. (1999) Convertible Securities and Venture Capital Finance. CEPR Discussion Papers 2317, CEPR Discussion Papers.
[3]	Green, R. (1984) Investment Incentives, Debt and Warrants. Journal of Financial Economics, 13, 115-136.
[4]	Black, F. and Scholes, M. (1973) The Pricing of Option and Corporate Liabilities. Journal of Political Economy, 81, 637-654. http://dx.doi.org/10.1086/260062
[5]	Jensen, M.C. and Meckling, W.H. (1976) Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3, 305-360.
[6]	Stein, J.C. (1992) Convertible Bonds as “Backdoor” Equity Financing. Journal of Financial Economics, 32, 3-21. http://dx.doi.org/10.1016/0304-405X(92)90022-P
[7]	Zhang, G.M. and Fang, Y.H. (2004) The Unique Role of the Convertible Bonds to Reduce Agency Costs. Techno- Economic, 5, 56-58.
[8]	Wang, D.N. (2006) Convertible Bonds Financing Based on Agency Costs. Accounts Monthly (Consolidation), 2, 43- 44.
[9]	Zheng, L. and Wang, Q.H. (2006) The Corporate Governance Structure under Convertible Bonds Financing. Group Economic Research, 194, 141-142.
[10]	He, J. and Xia, H. (2005) The Choice of Financing Instrument in Control Benefit Enterprises—The Theoretical Thinking of Convertible Bonds Financing. Economic Research, 4, 66-76.
[11]	Zhang, L. and Zheng, F. (2005) The Application of Convertible Bonds in Stock Option Incentives. International Business Research, 3, 45-47.
[12]	Ang, J.S., Cole, R.A. and Lin, J.W. (2000) Agency Costs and Ownership Structure. Journal of Finance, 55, 81-106. http://dx.doi.org/10.1111/0022-1082.00201
[13]	Singh, M. and Davidson, W.N. (2003) Agency Costs, Ownership Structure. An Corporate Governance Mechanisms. Journal of Banking & Finance, 27, 793-816. http://dx.doi.org/10.1016/S0378-4266(01)00260-6
[14]	Lv, C.J. and Zhang, Y.Q. (2002) The Impact of Enterprises Financial Status on Liability Agency Costs. Quantitative Technical and Economic Research, 12, 108-112.
[15]	Chen, D.H., Chen, X.Y. and Wan, H.L. (2005) The Compensation Control and Professional Consumption in State- Owned Enterprises. Economic Research, 2, 92-101.
[16]	Zhang, X.F. and Liu, C.J. (2006) The Empirical Research of Company Performance Trend before and after the Issuance of Convertible Bonds. Shanghai Finance, 7, 33-37.
[17]	Yuan, X.P. and Ke, D.G. (2006) The Study of Company Finance Performance before and after the Issuance of Convertible Bonds. Journal of Shanxi Finance and Economy University, 3, 124-129.