Research On The Effect Of Covernants With Protective Options And Rertrictive Covernants On Coupon Rate

In 2007,the first corporate bond Changdian bond was successfully issued,it marked that the corporate bonds boarded on the stage of China's bond market.Corporate bonds started late in our country and developed slowly,the establishment of the system and regulations and the corporate bonds pricing system were imperfect.The determination of the current coupon rate for corporate bond mainly uses the bookkeeping document;the price setting considered the market supply and demand,the degree of cash-rich and the current market interest rates.The primary market pricing basically belongs to the market-pricing policy.The issue of market-oriented pricing makes the state rate of corporate bonds an effective indicator of investors'risk assessment to corporate bonds There are many studies based upon on theoretical model and empirical analysis regarding factors that affect bond pricings.,this kind of research mainly studied from the systematic risk(such as macro factors),unsystematic risk(such as liquidity risk,credit risk,etc.).Previous literature has little to do in-depth discussion and analysis with regard to the influence of bond covenants to bond pricing,especially in bond coupon rates.Bondholders may face bigger risk because of the existence of information asymmetry between shareholders and bondholders.Bondholders require a higher risk premium in the bond interest rate.It increases the issuer's financing cost.When design contracts,Bond issuers use the covenants giving the right to shareholders and the covenants restricting on the behavior that issuer transfer bond investors' wealth,in order to alleviate the information asymmetry between shareholders and bondholders,protect investors from possible more risk.So the bondholders will lower the demand for risk premium,thus the issuer reduces its own financing cost.On the one hand,the covenants which can protect the bond holders,give them rights and can reduce their various risks;on the other hand,the adoption of these covenants,let the shareholders bear the obligation,limit the behavior of shareholders,damage the interests of shareholders.Bondholders,therefore,in order to get the corresponding rights and protection,must be at the expense of the coupon rate;Shareholders also get the corresponding returns because it let the bond coupon rate lower.Based on the above theoretical analysis,the introduction of the protective covenants can reduce the coupon rates.Based on the above background and theory,we selected the corporate bonds public offering since 2007 to June 30,2015,in China's bond market.Using treatment model to study how can protective covenants influence the coupon rate of the corporate bonds.Through the empirical analysis,we find that bond issuers tend to adopt more protective covenants to reduce the cost of financing at high-interest rate environment.The cost of adopting the restrictive covenants is higher with the high-volatility environment,so the issuer prefers not to adopt these restrictive covenants.Our main research results are that protective covenants can significantly reduce the coupon rate.The covenants with options for bondholders reduce real coupon rate by 118 to 129 basis points.The covenants limiting asset transfer can reduce real coupon rate by 83 to 98 basis points.The covenants limiting investment can reduce real coupon rate by 73 to 91 basis points.The covenants limiting financing acts can reduce real coupon rate by 54 to 76 basis points.We consider the management incentive factors and regional factors which can affect the selection of the covenants,the result is still significant.Then the basic characteristics of the bond,the issuer's visibility and the proportion of dividends since listed as control variable are added to our regression equation,the result is still significant,it shows that the results we get are robust.