**1. Motivation**

The previous literature has pointed out that financial constraints significantly influence companies. Fazzari et al. (1988), Kaplan and Zingales (1997), and Cleary (1999) proved that financial constraints affect the investment decisions of a company. Hoshi et al. (1991), Fohlin (1998), and Houston and James (2001) stated that the relationship between companies and banks affects the degree of financial constraints. Fazzari et al. (1988), Hoshi et al. (1991), Hubbard et al. (1995), and Cleary (1999) assumed that dividend payou<sup>t</sup> ratio also affects the degree of financial constraints. Chen and Wang (2012) suggested that companies with financial constraints have poor stock repurchase performance of treasury stock because they face a high financial risk.

Convertible bonds, with the dual characteristics of stocks and bonds, help alleviate the problem of information and agency costs caused by the external financing of companies. However, numerous studies have specified that the release and announcement of convertible bonds generate unfavorable messages, which in turn, have a negative effect on stock prices, causing issuing firms to receive negative stock performance (e.g., Dann and Mikkelson 1984; Mikkelson and Partch 1986; Stein 1992; Wolfe et al. 1999; Hillion and Vermaelen 2004; Ammann et al. 2006; Duca et al. 2012). For example, Duca et al. (2012) showed that convertible offerings announced between 1984 and 1999 induced average abnormal stock returns of −1.69%, and convertible announcement effects over the periods from 2000–2008 are more than twice as negative ( −4.59%) in US convertible debt. However, Kim and Han (2019) indicated that convertible bond issues have significantly positive cumulative abnormal returns around the announcement in Korea. In particular, issuing firms that state capital expenditure

as the use of proceeds have significantly higher cumulative abnormal returns compared to firms that state other purposes.

Among past literature, very few studies have been done examining the effects of financial constraints on the short- and long-term performance of companies after their announcement of issuing convertible bonds. The results of these limited research studies show that the bond issue announcement has a negative effect on the performance of companies. Theoretically, a company's performance is reflected in its stock price movement—a company that has better performance implies better returns and dividends, which in turn will be reflected in its stock price. The aim of this study is to investigate the relationship between the announcement of issuing convertible bonds and the stock price performance of a company with financial constraints.

Additionally, Luo (2011) argues that in comparison with companies without financial constraints, companies with financial constraints would more effectively use the limited capital that they raise in the future. The result indicates that the executives of the companies with financial constraints are relatively effective in terms of managing capital spending. Therefore, this study argues that companies with financial constraints tend to raise their funds by issuing convertible bonds that have a positive influence on innovation and investment activities, which in turn are expected to cause higher future cash flows and increases in asset value. Thus, the objective of this study is to also investigate the effects of financial constraints on the short- and long-term performances of companies after their announcement of convertible bond issuance.

The remainder of this paper is arranged as follows. Section 2 describes the data and model, Section 3 introduces the empirical variables, and Section 4 presents the empirical results. Findings are summarized in Section 5.
