The Influence Of Institutional Ownership On The Using Of Restrictive Bond Covenants

After the reform and opening up,China’s bond market began to develop gradually.In 1981,the issuance of treasury bonds started,marking the beginning of our bond market.In the subsequent development,due to a series of reasons,the development of the corporate bond market has been in a predicament and stagnated.Until August 2007,China Securities Regulatory Commission officially promulgated and implemented the "Corporate Bond Issuance Pilot Measures",which marked the official start of corporate bond issuance in China,broke the bottleneck of the development of China’s corporate bond market,expanded the financing channels of China’s corporate enterprises,and also provided investors with more choices.However,compared with the stock market,Chinese corporate bond market started relatively late,the institutional facilities are not perfect,and the protection of investors is far from enough.Financial contract theory shows that the basic principle of bond covenants is to control agency conflicts and allocate control rights.Smith and Warner(1979)argues that the covenants are used to control conflicts between bondholders and shareholders,limit corporate behavior and protect bond investors.In recent years,scholars in China and at abroad mostly focus on the impact of bond covenants on corporate investment,capital structure and stock price performance.Few scholars have studied the design of bond covenants.Capital is the source of enterprise development,according to Pecking Theory,when the enterprise needs external financing,debt financing becomes the first choice.The separation of ownership and management rights in modern corporations leads to the agency problem becoming an unavoidable problem in corporate governance.Owing to the different roles of the major shareholders and bondholders in the company,there is also a serious information asymmetry between them.The right of block holdings may participate in corporate decision-making and have an impact on the management’s business activities.And bondholders hope to protect their own interests by adding bond covenants.Since the second half of the 20th century,the proportion of institutional investors has increased rapidly.Institutional investors,with their professional advantages,information advantages,capital advantages and selection advantages,have gradually become the most important force in the investment field.Usually institutional investors hold more shares,which can affect the company’s decision-making to a certain extent.In the process of formulating bond covenants,institutional investors are reluctant to use too many restrictive covenants to restrict the development of companies.Therefore,institutional investors often interfere in corporate decision-making to reduce the use of restrictive bond clauses.At the same time,because institutional investors can participate in the company’s shareholding by "voting with feet",companies usually have better corporate governance mechanism in order to attract institutional investors to become a stable source of capital.Therefore,the existence of institutional investors itself effectively alleviates the information asymmetry between shareholders and bondholders,and invisibly in line with the interests of bondholders.So,under the assumption of common interest,due to the existence of Signaling Theory,the more institutional shareholdings,the better qualifications of the company will be transmitted to bond investors.So the existence of institutional investors can reduce the internal demand of creditors for bond covenants.Based on the above theoretical background,this paper takes 953 bonds issued by listed companies from 2007 to 2016 as a sample,using empirical research methods to explore the impact of institutional ownership on the design of restrictive bond covenants.This paper constructs the bond covenants usage index by manually summarizing and sorting out the restrictive covenants of listed company bonds.Through empirical regression,it is found that institutional ownership has a significant negative impact on the bond covenants usage index,that is,the more institutional ownership,the less restrictive covenants are used in the design of bond contracts.It verifies the common interest hypothesis between institutional investors and bondholders.Institutional investors can intervene in corporate governance to encourage management to take actions to increase corporate value,protect bondholders’ interests and reduce the use of restrictive bond covenants from both subjective and objective perspectives.In addition,this paper makes regression on different.sub-samples,and further explores the impact of institutional investors on restrictive bond covenants using by distinguishing whether bond issuers are state-owned enterprises.The empirical results show that institutional investors have a more significant impact on restrictive bond covenants in state-owned enterprises,while institutional investors have no significant impact on restrictive bond covenants in non-state-owned enterprises.We also explore the impact of institutional investors on the design of restrictive bond covenants by distinguishing the issuers’ listed plates.The results show that institutional investors have a more significant impact on the restrictive bond covenants in the companies listed on the mainboard,while institutional investors have no significant impact on the restrictive bond covenants design in the companies listed on the non-mainboard.What’s more,this paper further classifies the restrictive bond covenants according to the commonly used methods in international academic research,which can be divided into four categories:Investment restrictive bond covenants,Payment restrictive bond covenants,Financing restrictive bond covenants and Event-driven bond covenants.Empirical results show that institutional ownership has a negative effect on the terms of Investment and Payment restrictive bond covenants,and its significance has been strengthened,but it has no significant effect on the terms of Financing and Event-driven bond covenants.Finally,we use the instrumental variable method to solve the endogenous problem between institutional ownership and bond covenants,and the results are still significant.In addition,by adding relevant explanatory variables or changing the measure of the interpreted variable,using the proportion of institutional investors to regression the use of restrictive bond covenants,the results are still significant and robust.