The Research On The Restrictive Covenants In China's Corporate Bonds

There are a strand of benefits to directly raise capital through issuing corporate bonds,such as the high flexibility,liquidity,and low costs,which make it be widely adopted by firms in developed countries.However,comparing with the sophisticated corporate bond market in developed countries,the corporate bond market of China started relatively late,and developed slow for quite long time.The 2015 version"Regulations on the Issuance and Trade of Corporate Bonds" released by China Securities Regulatory Commission introduced a strand of reforms,which greatly inspired borrowers' and investors' interests in corporate bond market.At the end of 2016,the issuance scale of corporate bonds has surpassed the sum of enterprise bonds and medium term note,which makes it become the first choice of long-term bond financing.Although China's corporate bond market developed very fast in recent years,in the meanwhile,more and more corporate bonds encountered default events.This condition pushes market participants pay more attention to the internal credit risks of corporate bonds.As an endogenous investor protection method,restrictive covenants are becoming popular and widely adopted in bond contracts.These covenants can impose restriction on bond issuers' various behaviors which may harm bondholders'interests;they may also help bondholders to monitor issuers' specific decisions and cope with default events.In the developed countries,such as U.S.,restrictive covenants have been widely applied.However,in the corporate bond market of China,restrictive covenants still are new contracting terms.Therefore,the applying level and effectiveness of restrictive covenants in China's corporate bond market still need further studies.With the guidance of incomplete contracting theory,agency theory,information asymmetry theory and signaling theory,this dissertation try to investigate whether restrictive covenants have significant influences in the corporate bond of China.I construct my research sample based on the corporate bonds issued during the period 2007-2015.With the guidance of agency theory and information asymmetry theory,we specifically examine which factors significantly affect the adoption of restrictive covenants,how do restrictive covenants affect the costs of corporate bonds,and whether restrictive covenants can restrain bond issuers' overinvestment behaviors.First,this dissertation summarizes and categorizes the widely used restrictive covenants in China's corporate bond market,and indicates that not all restrictive covenants in China's corporate bond market are effective.With these analyses,I identify the main study objects:financing-related covenants and asset-sale covenants.Then I conduct research on which factors have significant influence on the adoption of these covenants.The empirical results indicate that,corporate bonds with larger issuance amount are less likely to include restrictive covenants.However,corporate bonds with longer maturity are more likely to include restrictive covenants.In addition,if the corporate bonds are underwritten by high reputation underwriters,they are more likely to include restrictive covenants in their contracts.At last,I find that the corporate governance of bond issuers also have significant effects on the adoption of restrictive covenants.Specifically,bond issuers with higher independent director ratio and lower share ratio of the largest shareholder prefer to use restrictive covenants in their bond contracts.Second,this dissertation examines the relationship between restrictive covenants and the costs of corporate bonds in China.I find that corporate bonds which incorporate restrictive covenants usually have lower costs of corporate bonds.This finding is robust to a strand of endogeneity and robustness tests.In the additional analyses,I find that the negative relationship between restrictive covenants and the costs of corporate bonds are stronger in issuers with higher dividend payout ratio.I also find that the negative relationship between restrictive covenants and the costs of corporate bonds are more pronounced when the bond issuer is state-owned.The effectiveness of restrictive covenants may rely on the good information environment,so I further investigate possible influence of accounting information quality.The empirical results indicate that the negative relationship between restrictive covenants and the costs of corporate bonds are more pronounced when bond issuers have higher accounting information quality.Third,to obtain deeper understanding on the real restrictive functions of restrictive covenants,this dissertation also investigates the impacts of restrictive covenants on bond issuers' overinvestment behaviors in the maturity of corporate bonds.The empirical results indicate that,if corporate bonds incorporated restrictive covenants,then the bond issuers are less likely to conduct overinvestment in the next year after bonds issuance.Further subsample analyses indicate that,restrictive covenants have significant inhibitory effect on issuers' overinvestment behaviors,but have no relationship with underinvestment behaviors.In the additional analyses,I find that further find that the negative relationship between restrictive covenants and overinvestment is more pronounced if the bond issuers have highrt dividend payout ratio,lower institutional shareholding ratio,or higher accounting information quality.