Differential Clienteles and Convertible Bond Underpricing----An analysis of the China market

摘要

The underpricing of convertible bonds has been a puzzle in the finance literature. We investigate the differential clienteles and liquidity hypothesis on China convertible market using large sample analysis. The empirical study shows that the theoretical values for the analyzed convertible bonds are on average more than 10.2% higher than the observed market prices. The underpricing has significant relationship on maturity, stock turnover and stock book-to-market ratio, and the relationship between convertible bond return and stock return are weaker than theoretical prediction. All these evidences support the differential clienteles hypothesis. We could not find further evidences supporting the liquidity hypothesis.