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The impact of penalty interest provisions on the issuance costs of perpetual bonds

Author

Listed:
  • Yu, Qianlong
  • Chen, Dandan
  • Wang, Xiaoping
  • Peng, Weilai

Abstract

Although the establishment of penalty interest provisions for perpetual bonds has garnered widespread attention, the literature focuses on a firm's financial attributes and renewal motivations behind such provisions. It is not clear for the impact of the penalty interest provisions on issuance costs. Using a sample of perpetual bonds issued by Chinese firms, we examine the impact of penalty provisions on issuance costs. Our findings suggest that when penalty interest provisions are less strict, the credit spread of perpetual bonds increase. Additional analysis suggests that the effect is more salient for highly leverage firms and for those located in very high or very low marketization regions. Hence, investors pay attention to the penalty interest provisions and adjust their required rate of return from perpetual bonds.

Suggested Citation

  • Yu, Qianlong & Chen, Dandan & Wang, Xiaoping & Peng, Weilai, 2024. "The impact of penalty interest provisions on the issuance costs of perpetual bonds," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 935-943.
    • Handle: RePEc:eee:reveco:v:93:y:2024:i:pb:p:935-943
    DOI: 10.1016/j.iref.2024.04.043
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