**2. The Model**

This study adopts the pooled ordinary least squares regression approach to investigate the relationship between the financial constraint and firm stock performance of convertible bond issuance.<sup>1</sup> The specifications of the model are as follows:

$$\begin{array}{l} \text{CAR}(\tau\_1, \tau\_2) = \beta\_0 + \beta\_1 HFC\_{i,t} + \beta\_2 SIZE\_{i,t} + \beta\_3 MB\_{i,t} + \beta\_4 FCFratio\_{i,t} \\ \quad + \beta\_5 STDAR\_{i,t} + \beta\_6 LEV\_{i,t} + \beta\_7 Rm\_{-}Rf\_{i,t} + \varepsilon\_{i,t} \end{array} \tag{1}$$

where subscripts *i* and *t* indicate a sampled company and current period, respectively. In this study, the cumulative abnormal returns (*CAR*) was considered as the dependent variable, and the financial constraint indicator (*HFC*) was set as the independent variable. If *CAR* is influenced by financial constraint, the coefficient *β*1 will be statistically significant. *β*1 is expected to be positive. This implies 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 have higher future cash flows and increases in asset value.

Following the works of Marsh (1982), McConnell and Muscarella (1985), Jensen (1986), Lakonishok and Vermaelen (1990), Pilotte (1992), Spiess and Affleck-Graves (1995), and Pettengill et al. (2002), this study adopted company size (*SIZE*), market net value ratio (*MB*), free cash flow ratio (*FCFratio*), information asymmetry (*STDAR*), debt ratio (*LEV*), and market trend (*RmRf*). *SIZE* refers to the natural logarithm of a firm's market value. *MB* refers to the ratio of market value of a company to its net worth. *FCFratio* refers to the ratio of free cash flow to total assets. *STDAR* is the residual standard deviation of the daily rate of return, measured according to market mode. *LEV* is the ratio of total debt to total assets. *RmRf* is the difference between the monthly return on Weighted Stock Index and risk-free rate.

<sup>1</sup> Panel data regression was run with fixed effect in addition to pooled ordinary least regression approach. This yielded favorable results which support our claim, that companies with high financial constraints have higher long-term performance after issuing convertible bonds.

Moreover, using the heteroscedasticity consistent estimator introduced by White (1980), this study adjusted the standard error of the estimated parameters and modified the heterogeneity variation. Considering the date of announcement and the completeness of the variables, there were a total of 418 TAIEX-listed and OTC-listed companies issuing convertible bonds in Taiwan collected from Taiwan Economics Journal covering the period from 2005 to 2009.
