A Study On The Relationship Between Corporate Bond Covenant Protection And Credit Spreads

Whether the bond investor is engaged in the subscription of the bond market or the purchase of the secondary market means that he will be the creditor of the issuing company.However,the creditor is not directly involved in the control and control of the company.He will entrust to the shareholders and manager which causes agency conflicts between creditors and shareholders.For the value maximization,Shareholders may take a series of profit-making behaviors,such as dividends,etc.to transfer cash flow.These behaviors will destroy the interests of creditors.In order to protect their own interests,the creditor can make covenants with the issuing company to restrict the behavior of the shareholders,which may allow the bond investor to avoid the possibility that the interest is infringed or even the debt cannot be paid.For bond investors,investing bonds are not only concerned about the maturity of the bond itself,but also concerned about the credit spreads of the bond.Covenants provide two options for investors: First,do not consider the covenants,just choose the bonds of high credit spreads,of course.Second,do consider the covenants and choose the bonds of lower credit spreads.If the second option does exist and reasonable,that is,the protection of the covenants can be reflected in the credit spreads,and the covenants can really play a role.Our research can not only enrich the credit spread factors,but also help achieve a reasonable pricing.Investors can choose bonds to invest easily and the issuing company can take it as a reference.Based on the above analyses,the research of this paper include mainly two aspects: the first one is whether the protection of the contract clause is reflected in the credit spreads;then when the bond market is adjusted and the credit risk of the bond price increases,do covenants really work? From the research situation,China's research on the explanatory factors of credit spreads has some experience,but the literature on credit spreads from the perspective of contract terms is relatively small,and basically mainly stays in the primary market.Study on the negative impact of the bond market adjustment is even scarcer.This paper takes the corporate bonds as the research object,and uses combination of normative analysis and empirical research to study the above problems under the framework of agency theory.First of all,the conflict between creditors and shareholders are the reverse selection and moral hazard.The information asymmetry that leads to the reverse selection can be reduced by the system of issuance and listing of corporate bonds.The mitigation of the risk requires the participation of the covenants.On the basis of the theoretical analysis,we have two hypothesis.The first one is when the degree of contract protection is higher,the credit spread is smaller.The second one is when the negative impact makes a large adjustment in the bond market covenants can help to protect the interests of bond investors.Furthermore the higher the degree of covenants,the smaller the increase in credit spreads.For hypothesis 1,the credit spreads of corporate bonds are chosen as the explanatory variables.On the basis of the previous studies,the covenants are divided into the options,the option class,the asset transfer restrictions on the terms,investment restrictions,the terms of creditors' governance,the terms of refinancing,and the contractual provisions of the sample of corporate bonds.Then we construct covenant protection index as explanatory variables,and the control variables to determine the regression.In addition,in order to verify the hypothesis 2,we choose the increment of the corporate credit in the time interval as the explanatory variable.Through the theoretical analysis and the test of empirical data,we draw the following conclusions: First,China's corporate bond covenant protection index and credit spreads are significantly negative,credit spreads do reflect the contract terms of bond investors protection,The higher the degree of contract protection,the smaller the credit spread is verified.It is worth noting that the greater the number of contract terms to bond investors,the higher the degree of protection,but the smaller the credit spreads,which means that bond investors the amount of contractual damages that can be obtained by the purchase of corporate bonds will be reduced,and the amount of the final contract clause will depend on how the bond investor weighs the bond yield and the terms of the bond to protect their own interests.Second,when the contract protection index is higher,the smaller the change in the credit spreads;the less the contractual provisions can help to protect the interests of the bond investors when the negative shock makes the bond market adjusted.This paper has the following contributions to the research on the relationship between the protection of bond investors and the credit spread.First one is the contribution of the research data.Manual collection and finishing of the 2007-2015 compliance with the sample requirements of the 325 corporate bonds to rise the terms of the contract terms for the Chinese corporate bond contract terms of the status quo can provide data support.Second one is research perspective contribution.From the perspective of the terms of the contract to enrich the credit spread of factors affecting the study.So far from the perspective of contract terms to study the credit spreads constitute less literature,to explore easily overlooked contract terms and credit spreads between the relationships to make up the contract terms rarely used for credit spreads of the research situation.On the basis of the fact that there is little research on the relationship between contract terms and credit spreads,this paper chooses the time interval of the bond market adjustment in 2013.When the bond industry is facing negative impact,the covenants are really able to help protect the interests of creditors and reflected in the changes in credit spreads,for bond investors to filter the bonds to be invested in the provision,and to the bond company to design the terms of the contract to provide reference.In the course of the study,in addition to a lot of the control variables of the corporate characteristics and the characteristics of the bond itself,we also include the underwriters and auditors as dummy variables.