The impact of readability of risk disclosures in bond prospectuses on credit risk premium

Abstract

This paper for the first time analyzes the impact of the readability of risk disclosures in bond prospectuses on the credit risk premium. In the empirical analysis, the textual data including 5194 corporate bond prospectuses and structured data related to the corporate financial factors and the bond characteristics from 2006 to 2021 are used to perform the fixed effect regression analysis. The empirical results show that increasing the readability of the risk factor chapter in bond prospectuses will increase the credit risk premium by raising the investors’ risk perception. Additional tests demonstrate that ceteris paribus, the positive impact of the readability of risk disclosure in the bond prospectus on the credit risk premium will be weakened by implicit government guarantees carried by a state-owned issuer and the listing status of the bond issuer but be strengthened by better corporate business performance, more financing constraints, and higher financial distress risk.