Wealth effects and enterprise performance changes of debt-to-equity swap
【Abstract】Market-oriented debt-to-equity swap (DES) plays a critical function in two ways. It is the fastest way to de-leverage in macro-economy, and also the breakthrough in promoting the mixed ownership reform for state-owned enterprises (SOEs), and improving corporate governance. This paper firstly analyzed the economic consequences of DES on zombie enterprises and non-zombie enterprises through a theoretical model. Then, we collected the publicly disclosed DES cases from August 2016 to December 2018. Based on the financial data disclosed by bond-issued DES enterprises, we used the FN-CHK method to determine whether there are zombie enterprises in DES sample. Furthermore, we calculated the cumulative abnormal returns (CARs) for bonds and stocks issued by DES enterprises and compared these CARs among state/non-state owned enterprises as well as zombie/non-zombie enterprises. Finally, we used the propensity score matching (PSM) method to match the comparable non-DES enterprises for the DES ones. On the basis of the matched sample, difference in differences (DID) method was used to test financial performance for DES enterprises. Our findings are as follows. (1) Among 74 DES enterprises providing financial data, there are 19 zombie enterprises, accounting for 25.3% of the sample. Before the DES announcement, these 19 enterprises have the history of being zombie enterprises for more than two years, among which eight enterprises have become zombie enterprises for more than four years. (2) As for the short-term market event study, the difference in DES announcement response between zombie enterprises and non-zombies enterprises has been efficiently recognized in the bond market. The prices of bonds issued by zombie enterprises have dropped significantly within 30 days before and after the announcement of DES, while the prices of bonds issued by non-zombies enterprises have increased significantly. The stock market has a relatively neutral response to DES on the whole, but leaving negative records for non-SOEs. In terms of financial performance changes, we used PSM-DID method to test the effects of DES. We found that operating performance changes within [−1, +1] year period for zombie enterprises and non-zombie enterprises are largely different. For non-zombie enterprises, DES reduces debt pressure, improves profitability, operating efficiency and solvency; for zombie enterprises, DES only decreases financial leverage, but brings no improvement to profitability, operating efficiency and solvency. Contributions of this paper are listed as follows. Firstly, we use real DES samples to study the actual mechanisms of deleveraging. We find that for different types of enterprises, there are structural differences in short-term and long-term DES performances. Secondly, we conduct relatively early empirical study for this new round of Chinese market-oriented DES. Thirdly, this paper conducts creative research on disposal of zombie enterprises from the perspective of DES, and finds that wealth effects and performance changes of DES are relatively negative.
【Keywords】 market-oriented DES; zombie enterprises; wealth effects; financial performance;