Convertible bonds and firm’s total factor productivity

Enhancing total factor productivity is a key initiative to promote high-quality economic development and build a strong socialist modern state comprehensively. We examine the impact of convertible bonds on firm’s total factor productivity and the corresponding mechanism based on a multi-period difference-in-differences model. We find that convertible bonds can significantly increase firm’s total factor productivity. The mechanism tests show that convertible bonds can improve total factor productivity by alleviating financing constraints and optimizing resource allocation. The heterogeneity tests show that debt-like convertible bonds have a more significant impact on total factor productivity. Moreover, the contribution of convertible bonds to total factor productivity is more significant in firms with higher external monitoring and regions with lower financial development. Our paper adds empirical evidence on the economic consequences of convertible bonds from the Chinese capital market and complements the research framework in the field of financial development and economic growth, which has important implications for promoting innovation in financial instruments and high-quality economic development in China. © 2023 Systems Engineering Society of China. All rights reserved.