Do underwriters with foreign shareholders help protect bond investors? Evidence from bond covenants in China

Abstract

Using samples of corporate bonds issued by Chinese A-share firms from 2007 to 2019, we examine the impact of having a local underwriter with foreign shareholders (UFS) affects the number of bond covenants. Our findings suggest that an UFS, on average, adds more covenants to its underwritten bonds to protect the interests of bondholders than local underwriters without foreign shareholders (UNFS). Our conclusion remains robust to alternative metrics of bond covenants and foreign shareholders, and after accounting for endogeneity. Additional analyses suggest that the effect of UFS on bond covenants is more salient when: 1) the issuer is opaque, has a duality of board chair and CEO, or is a non-state owned firm, 2) the issuer is located in a poor legal environment, in a low marketization area, or a region with poor economic development, 3) the foreign shareholder of the local underwriter has experience in its home market, is from a country with a better legal environment, or has ample experience in the Chinese underwriting business, or 4) after a major issue default in 2014. Furthermore, we find underwriter profit seeking and the benefits of repetitive financing motivate firms to hire UFS.