Exploring the multifaceted impacts of convertible bond issuance on stock market quality: Evidence from China

We investigate how convertible bond issuance impacts stock market quality across four dimensions: liquidity, price efficiency, excess returns, and volatility, using Chinese market data. Findings reveal that convertible bond issuance enhances liquidity and price efficiency but also leads to increased volatility and reduced excess returns. We identify two primary mechanisms: first, the conversion of convertible bonds impacts all four dimensions of market quality; second, high-frequency trading of these bonds reduces stock market volatility, mitigating the overall effect. Heterogeneity analysis indicates that these effects are stronger among firms with smaller market capitalizations, lower-rated convertible bonds, and during negative sentiment periods.