Market-oriented Debt-to-Equity Swap （DES） plays a critical function in two ways: One is the fastest way to de-leverage in macro-economy; the other is breakthroughs in promoting the SOE’s mixed ownership reform, and improving corporate governance. The article firstly analyzes the economic consequences of DES on zombies and non-zombies through a theoretical model. Then, we collect the publicly disclosed DES cases from August 2016 to December 2018. Based on the financial data disclosed by bond-issued DES companies, we use the FN-CHK method to determine whether there are zombies in DES sample. Furthermore, we calculate the CARs for bonds and stocks issued by DES companies and compare these CARs among state/non-state as well as zombie/non-zombie firms. Finally, we use PSM method to match the comparable non-DES companies for the DES ones. On basis of the matched sample, DID method is used to test financial performance for DES companies.
Our findings can be concluded that: （1） Among 74 DES companies providing financial data, there are 19 zombies, accounting for 25.3% of the sample. Before the DES announcement, these 19 companies have the history of being zombies for more than 2 years, among which 8 companies have become zombies for more than 4 years. （2） As for the short-term market event study, the difference in DES announcement response between zombies and non-zombies has been efficiently recognized in bond market. The prices of bonds issued by zombies have dropped significantly within 30 days before and after the announcement of DES, while the prices of bonds issued by non-zombies have increased significantly. The overall response of the stock market to DES is relatively neutral, but leaving negative records for non-SOEs. In terms of financial performance changes, we use PSM-DID method to test the effects of DES. We find that operating performance changes within [-1, +1] year period for zombies and non-zombies are largely different. For non-zombies, DES reduces debt pressure, improves profitability, operating efficiency and solvency; for zombies, 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 creatively new try on disposal of zombies from the perspective of DES, and finds that DES’s wealth effects and performance changes are relatively negative.