Does prospectus readability matter for bond issuance pricing? Evidence from China

Abstract

We investigate the informational role of prospectus readability in determining the pricing of newly issued bonds in China. We construct a text-based measure of prospectus readability and find that less readable prospectus is associated with higher credit spread of newly issued bond. Furthermore, we then find that less readability of prospectus is associated with higher default probability of issuers, which lends support to the information manipulation view of readability. Moreover, we observe that the relationship between readability and spread is more pronounced for issuers with lower ratings and private ownership, as well as for bonds lacking external guarantees and associated with less reputable underwriters. These findings collectively highlight the importance of prospectus readability as a determinant of bond pricing in China, indicating that investors require a risk premium for bonds with inferior readability in their prospectuses.