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Debt covenants and credit spread valuation: The special case of Chinese global bonds

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  • Chang, Sean Tat
  • Ross, Donald

Abstract

Bond covenants protect against risk factors in Chinese global bonds. This paper examines the impact of bond covenants on credit spread valuation and the configural cue processing of analysts in the aftermath of the Global Financial Crisis at the beginning of the 2011 China economic slowdown. We used a mixed methods approach that incorporates surveys and interviews to collect data from bank and investment analysts representative of the market. The results reveal important and statistically significant relationships between Chinese global bond valuation and covenant protection against 1) information asymmetry; 2) the agency problem; 3) financial distress and 4) bankruptcy. Covenant protection against bankruptcy is identified as the most significant factor in main effects and two-factor interactive effects. This is followed by a moderate influence on bond valuation from covenant protection against agency problems, financial distress and information asymmetry risks.

Suggested Citation

  • Chang, Sean Tat & Ross, Donald, 2016. "Debt covenants and credit spread valuation: The special case of Chinese global bonds," Global Finance Journal, Elsevier, vol. 30(C), pages 27-44.
    • Handle: RePEc:eee:glofin:v:30:y:2016:i:c:p:27-44
    DOI: 10.1016/j.gfj.2016.05.004
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    More about this item

    Keywords

    Corporate bond; Debt covenants; Bond valuation; Bond pricing; Credit spread valuation; Risk pricing;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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