Do China’s new convertible bond trading regulations affect the stock market?

This study examines whether China’s New Convertible Bond Trading Regulations, which came into effect on 1 August 2022, affect the stock market. Using a regression discontinuity in time design, I find that the regulations significantly reduce underlying stocks’ price-to-earnings ratios, suggesting that regulatory constraints in the convertible bond market help correct inflated stock valuation. This finding remains robust across a series of tests. Mechanism analyses reveal that abnormal trading patterns in the convertible bond market increase stock valuation. These analyses also provide evidence that the regulations exert cross-market spillover effects by reducing manipulation-induced misleading price signals. Heterogeneity analyses indicate that this spillover effect is more pronounced among firms with lower institutional ownership or poorer disclosure quality. Further analyses show that the regulations also reduce underlying stock turnover. Overall, these findings extend the literature on the interdependence between convertible bond and stock markets and highlight the importance of considering cross-market regulatory consequences in policy design.