A Study On The Protection Mechanism Of Chinese Corporate Debt Investors

China’s capital market has experienced rapid development in the two decades; andgradually formed a makert with multi-product, multi-level which could meet multi-need of various investors. Howerver, the development of capital market is not balanced in China. As one way of direct financing, Chinese bond market, especially corporate bond market, is far from sufficient related to the stock market. What’s more, China’s enterprise used to fnance with bank loan, expecially short-term loans. This situation leads to too much risk in Chinese banking system, endangering the stabilityandsustainablity of the capital market development. Hence, public bond market development has become increasingly important as for the reform of China’s capital market. Corporate bonds was not introduced into China’s capital market until2007, andthe system is not yet mature, evidenced by the fact that the transition from the traditional guarantee to covenant design for bondholder protection is still in its preliminary stages. In fact, recently, a coroporate bond named as "11Chaori Corporate bond" are facing delisting crisis, whichs reveal the weakness of bondholders’ protection mechanism in China. Based on the reality, it is essential to study the bondholders’ protection mechanism.Theoracily speaking, there are two source of agency conflict between the bondholder and the shareholder, namely, adverse selection and moral hazard. The examination and approval system is a key way to slove adverse section problem in Chinese corporate bond market. In addition, issuers could send singles, such as hiring audit firm of reputation or adopting strict bond covenants to the market to reduce adverse selection problem.besides, there are four sources of moral hazard problem, namly cash payout, claim dilution, asset substitution and insufficient investment. Better bond covenant design, as long as higher audit quality, could low the agency cost arised from the four sources.We use data from the first bond, which was issued in2007, to the end of2011to get a general idea of bondholders’ protection mechanism in China. Moreover, we also examine the effectiveness of it based on the agency theory, contract theory and asymmetric information theory. First of all, Default risk is one of the most important risks for corporate bond investors. This paper studies the relations of audit quality and credit rating. Then, I study the relationship between the cost of debt and corporate bond covenant in China. Finally, I focus on the relationship between the cash payout policy and the coproate bond covenant.Firstly, I invstigate the relations of audit quality and credit rating. Credit rating serves as a basis for determining credit risk and bond price. Credit rating agency could use audited accounting information to decide rating grade of a certain firm. With the increase of audit quality, accounting information is more accurate and the insurance provided by the audit firm is more beneficial, which leads to lower information asymmetry, hence higher bonds’rating and issuers’rating. Our empirical analysis shows that a bond or an issuer with better audit quality, the issuer’s bond rating or issuers’rating tends to be higher, and these relationships tend to be lower in States owned enterprises and central government controlled firms.Secondly, I examine the relationship between the cost of debt and corporate bond covenant in China, with manually collect covenant data, I estimate the degree of bond protection based on different designs of bond covenants. We discover that, The better protection for bondholders, the lower the cost of corporate bond; the shorter maturity, the cost of debt is more likely to be lower; and the higher z_score is, the cost of debt tends to be lower. Those results suggest that when the issuers attempt to design bond covenants for better protection of bondholders and mitigating the agency conflicts between bond issuers and investors, their costs of debt are likely to be lower.Finally, I study the relationship between the cash payout policy and corporate bond covenant in China. I divide the bondholders’protection index into two types: event index and governance index. Via the comparison between groups and multiple regression analysis method, I find that bond covenant could reduce the company’s cash dividend level. Further, I find that this relationship mainly caused by governance covenant design.The main contribution of my dissertation is manually collecting and analyzing the bond covenants. Then, I estimate the degree of bond protection based on different designs of bond covenants. Based on the degree of bond protection, I discover that the better protection for bondholders, the lower the cost of corporate bond. In addition, our empirical analysis shows that a bond or an issuer with better audit quality, the issuer’s bond rating or issuers’ rating tends to be higher. We also provide empirical evidence on the substitutional relationship between different bond investor protection mechanisms. I hope this research can provide a new viewpoint to bond issuers and can be helpful to the bond investors, credit rating agencies, as well as regulators.