Debt covenants and credit spread valuation

the special case of Chinese global bonds

Sean Tat Chang*, Donald Ross

*Corresponding author for this work

Research output: Contribution to journalArticle

1 Citation (Scopus)

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.

Original languageEnglish
Pages (from-to)27-44
Number of pages18
JournalGlobal Finance Journal
Volume30
DOIs
Publication statusPublished - 1 May 2016

Keywords

  • Bond pricing
  • Bond valuation
  • Corporate bond
  • Credit spread valuation
  • Debt covenants
  • Risk pricing

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