Bond Covenants and the Cost of Debt: Evidence from China

Guangming Gong · Si Xu · Xun Gong

21 citations0/0 files storedEmerging Markets Finance and Trade

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Corporate Finance and Governance Corporate Insolvency and Governance Credit Risk and Financial Regulations

Abstract

We examine how the use of covenants in the bond contract affects the cost of debt by using a sample of Chinese firms. We find that (1) the use of financing-related and asset-sale covenants is negatively associated with the cost of debt; (2) the negative relations between financing-related and asset-sale covenants and the cost of debt are more pronounced when a firm’s agency conflict is severe or accounting quality is high; (3) the negative relations between financing-related and asset-sale covenants and the cost of debt are significantly intensified if the issuer is a state-owned enterprise (SOE).

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