The Research On The Effect Of Customers’ Characteristics On The Pricing Of Corporate Bond Issuance

Since the China Securities Regulatory Commission implemented the "Pilot Measures for Corporate Bond Issuance" in 2007,the corporate bond market has developed rapidly.By the end of 2019,the total amount of corporate bond issuance has exceeded 10 trillion yuan.Issuing corporate bonds has become one of the measures for many firms to obtain long-term direct financing,which also means that there are more and more investment targets for investors to choose in the corporate bond market.How to effectively evaluate the credit risk of corporate bonds and demand for the corresponding risk premium has become a difficult problem for bond investors.For corporate bond issuers,the level of risk premium required by bond investors directly affects the pricing of corporate bonds in the market,which directly affect the cost of corporate bond issuance.According to the information asymmetric theory,the information asymmetry between issuers and bond investors is obvious.Bond investors need to acquire issuers’ operating performance and solvency from the publicly disclosed information of issuers,and demand corresponding risk premium based on the credit risk of issuers.Information transfer theory suggests that investors not only focus on the information of firms’ own financial performance,but also pay attention to the information of other firms,which are value-relevant for the issuers.Customers,as the important stakeholders of the firm,directly affect the firms’ operating performance.Specifically,the purchase demand and ability of customers determine the firms’ sale revenue,and further related to the issuer’s solvency at the maturity of the corporate bond.However,customers are not homogeneous.The characteristics of different customers show their differentiated purchase demand and ability will directly affect transaction costs of both parties and have various effect on the operating performance of upstream firms.Therefore,the issuers’ main customers may convey various signal of firms’ business performance to bond investors.Based on previous studies,this paper investigates the characteristics of issuers’ main customers from three dimensions: the qualification of the main customers,the geographical distribution of the main customers and the stability of the main customers.These three dimensions respectively affect the assurance degree of the firm’s operating income,the transaction cost paid in the transaction process between firms and their customers,and the persistence of the future revenue transmitted by the stable supply-chain relationship.Hence,the paper utilizes the sample based on the corporate bonds publicly issued by listed firms on the Shanghai and Shenzhen Stock Exchanges during the period 2007-2019 to mainly explore the following questions: Whether bond investors can recognize the signals of firms’ operating performance conveyed by their customers’ characteristics,and then affect investors’ demands for risk premium? What is the impact of these characteristics of customers on the firms’ operating performance,and then affect the credit risk assessment of corporate bonds by investors? Whether the influence of customer characteristics on corporate bond issue pricing depends on different conditions,that is,in what condition is the effect of these customer characteristics on corporate bond issue pricing more obvious?To solve the above issues,the empirical part mainly of this paper includes the following contents:In the third chapter,this study explores the influence of customer qualifications on the pricing of corporate bond issuance,finding that issuers with excellent customers’ qualifications are associated with lower pricing of corporate bonds.The reason is that corporate bond investors can identify the impact of customers with different qualifications on the production and operation of the issuing firms.If the top five customers of the issuing firms have highly qualified customers(government-based or public firm customers),they have a higher degree of protection for the issuers’ operating income and convey positive signals of the issuers’ business performance,which leads investors to reduce the requirements for risk premiums.This result is robust to a range of robustness checks including alternative measures of main variables and the use of weighted averages.To alleviate the potential endogenous problems,we employ propensity score matching analysis(PSM),change model method,and other fixed effects.In the mechanism analysis,we find that highly qualified customers have a positive impact on the future growth of sales revenue,and then send a positive signal of the firm’s business performance to investors.Furthermore,we find that the negative relationship between customer qualifications and the pricing of corporate bonds is more obvious in the subsample of non-centrally controlled enterprises and customers that are non-foreign joint ventures,showing that the negative effect of customer qualifications on corporate bond issuance pricing depends on the issuers’ background characteristics and other capabilities of the main customers.In the fourth chapter,this paper investigates the influence of customers’ geographic distribution on the pricing of corporate bonds.The results suggest that issuers with geographically dispersed or distant customers are associated with higher pricing of corporate bond issuance.Investors can identify risk signals related to the operating performance of issuers conveyed by the customers’ geographic characteristics,that is,geographically dispersed or distant customers reduce the efficiency of information exchange between firms and their customers,and firms generally spend more transaction costs maintaining the supply-chain relationship,and even lead to the relationship broken due to geographical inconveniences,which leads investors to demand higher bond yield spread as risk compensation.The result is robust to a series of robustness checks,including instrumental variable approach(IV),two-stage Heckman regressions and so on.The mechanism test shows that firms with geographically dispersed or distant customers need to spend more transaction costs maintaining business relationship with downstream customers,thus transmitting the risk signal of business operation to bond investors.Further results show that the relationship between customers’ geographic dispersion/distance and corporate bonds issuance pricing is weaken when issuers audited by big audit firms or issuers located in a good traffic condition.In the fifth chapter,this study explores the influence of customers’ stability on the pricing of corporate bond issuance,suggesting that when the stability of the main customers of the corporate bond issuer is higher,the investors demand a lower risk premium,that is,the lower the pricing of corporate bond issuance.Investors can identify positive signals related to the operating performance of issuing firms conveyed by stable customers.A firm with stable customers can reduce the cost of information communication in the transaction process and provide more assurance for the future income of the upstream firm,which improves the issuer’s solvency at the maturity of the bond.Hence,investors reduce the requirement for risk premium.The result is robust to a series of robustness checks and endogeneity tests.The mechanism analysis shows that the stability of customers reduces the volatility of the rate of return on assets of the issuing firm,and then conveys a positive signal of operating performance to investors.Moreover,when the uncertainty of economic policy is high,or when the issuer is far away from the regulator,bond investors pay more attention to the impact of customer stability on the production and operation of the issuer,which makes the negative association between customer stability and the pricing of corporate bond issuance more obvious.This study contributes to the literature in the following ways:This paper contributes to the literature on the supplier-customer relationship.Conventional studies view firms’ customers as "homogeneous",and explore the impact of customer concentration on the firms’ production and operation.Based on the perspective of supply-chain information transfer,this paper depicts the specific characteristics of main customers to convey business-related signals to the capital market from three dimensions,which affect bond investors’ credit risk assessment of issuers and then affect the pricing of corporate bond issuance.This paper is an empirical literature that comprehensively analyzes the role of customers’ specific characteristics in corporate bond pricing in the existing studies.This paper extends the relevant literature on the pricing of corporate bond issuance.Prior studies on the impact of external stakeholders on the pricing of corporate bond issuance are limited.Based on the emerging corporate bond market in China,this article reveals that customers,as important stakeholders of firms,affect investors’ assessment of issuers’ credit risks and explores various signals conveyed by different characteristics of customers to the capital market.This paper is also helpful for regulators and investors to identify the credit risk of issuing firms by identifying customers’ specific characteristics and improve the pricing mechanism of the corporate bond market.Compared with the previous literature mainly investigating the effect of major customers on the upstream firm itself,this article finds that customer information has a "spillover effect",which not only affect the upstream firm itself,but investors evaluate the credit risk of upstream firms based on customer information.This study finds that bond investors can identify the relevant signals of the firm’s production and operation conveyed by the customers’ qualifications,customers’ geographic dispersion and customers’ stability.In the mechanism analysis,this paper investigates how these customers’ characteristics affect firms’ operation,and then affect bond investors’ demand for risk premiums.This study has some implications for issuing firms,bond investors,regulators,government departments and other stakeholders: 1)For firms issuing corporate bonds,it is necessary to improve the level of detail in customer information disclosure,thereby reducing the information asymmetry between firms and external investors,and obtaining the lower debt financing costs.Firms should bring the main customers into the company’s own risk prevention and control system,and timely communicate with customers to acquire customers’ product demands.It is also necessary to actively adopt a variety of strategies to reduce the adverse impact of existing customers’ risks on the firm itself.2)For corporate bond investors,they should pay more attention to the non-financial information(such as customer information)disclosed in the corporate bond prospectus,and analyze whether existing customers can effectively support the business performance of the issuing firm.,and whether the customers’ own risks will be transmitted to the upstream firm along with the supply chain relationship.By analyzing customer information,bond investors can evaluate the credit risk of the firm more accurately to reduce investment risk.3)Regulators should improve the customer information disclosure system of listed firms,and let investors more fully understand the operation of issuers.4)Local governments should increase investment in infrastructure construction,reduce the cost of firms’ expansion to external markets,and create a better marketing environment for enterprises.5)The relevant research on supply chain information in the field of financial accounting in China should be based on China’s current supply chain information disclosure system and further explore the role of the specific characteristics of supply chain partners in the capital market.