Bond Funds Research Articles

BANKING AND BANKING REFORMS IN CHINA IN A MODEL OF COSTLY STATE VERIFICATION

AbstractWe present a macro view of China's financial system where a monopolistic banking sector coexists endogenously with bonds and private loans. In equilibrium smaller firms raise finance from private lending, larger firms through bank loans, and the largest by issuing bonds. The model predicts that expanding credit supply increases bank loans but reduces bond finance and private lending, in absolute terms and relative to total credit. In addition, removing the interest rate ceiling on bank lending—a recent reform in China—induces larger loans and higher lending rates, lowering the share of bank loans in total credit. Empirical evidence is presented to support these predictions.

Financing mode decision of characteristic tourist town based on improved G1 and Z-number-TOPSIS: the Chinese case

PurposeThe objective is to address financing challenges with an innovative technical approach and provide financial support to facilitate the sustainable development of characteristic tourist towns.Design/methodology/approachIn this study, a novel decision model is proposed, which utilizes the CRITIC improved G1 weighting method to analyze financing factors and applies GRA to enhance the TOPSIS model under a Z-Number fuzzy environment. Finally, sensitivity analysis and comparative assessment were conducted to validate the findings and the model.FindingsThe findings indicate that equity financing is the optimal mode of financing for characteristic tourist towns, with bond financing serving as a viable alternative. Key factors influencing financing include economic benefit, social benefit and policy risk. Managers should carefully consider these factors when selecting financing methods in order to enhance efficiency and mitigate risks.Originality/valueAs a new business model and value creation method of cultural and tourism integration, the financing decision of a characteristic tourism town has always been the key to the overall promotion and operation. The research constructs a financing index system for characteristic tourism towns based on benefit and risk considerations, using the hot spring town in Anhui Province, China, as a case study to evaluate eight financing models.

The effect of bond ownership structure on ESG performance

We examine whether firms' ESG performance is influenced by bondholder preferences. We argue that insurance companies have unique incentives to monitor bond issuers' ESG performance because insurers face enhanced exposures to ESG shocks in their balance sheets and trading operations. Consistent with this argument, we find that firms with higher bond ownership by insurance companies are associated with higher future ESG ratings. To address potential identification concerns, we test changes in bond issuers' ESG ratings following the initial bond investment by insurance companies. We find that firms' ESG performance improves after insurance companies' initial bond investment. We also find that this improvement in ESG performance is concentrated in firms with greater reliance on bond financing and investment capital from insurance companies. Our study underscores the importance of bond ownership structure in influencing corporate ESG performance.

Development of Green Finance and Sustainable Investment: A Case Study of the Issuance and Operation of SF Holdings' Green Bond Financing Project

Development of Green Finance and Sustainable Investment: A Case Study of the Issuance and Operation of SF Holdings' Green Bond Financing Project

Estimation of Tax Benefit of US Nonprofit Hospitals

Nonprofit hospitals are under increasing scrutiny to justify the generous tax benefit they receive due to their tax-exempt status. Quantifying the value of the tax benefit they receive at the federal, state, and local levels is critical for designing informed public health policies and ensuring nonprofit hospitals' taxpayer accountability. To estimate the financial benefit that nonprofit hospitals derive from their tax-exempt status and assess how the benefit is distributed across state and local communities. Using methodologies and measures consistent with current tax law and practice and data from 2021 Medicare Cost Reports, this study calculated the total financial benefit from nonprofit hospitals' tax-exempt status for all US nonprofit hospitals with the required Cost Reports data. Nonprofit hospitals' total tax benefit, which equals the sum of federal and state income tax, sales tax, property tax, the fair market value of charitable contributions from donors, savings from tax exemptions on issued bonds, and federal unemployment tax. A total of 2927 US nonprofit hospitals received a $37.4 billion total tax benefit in 2021 from federal income tax ($11.5 billion; 31%), sales tax ($9.1 billion; 24%), property tax ($7.8 billion; 21%), state income tax ($3.7 billion; 10%), charitable contributions ($3.2 billion; 8%), bond financing ($2.1 billion; 6%), and federal unemployment tax ($200 million; <1%). Tax benefit varied substantially across states, from $25 098 (Delaware) to $159 464 (Massachusetts) per hospital bed and from $19 (Alabama) to $275 (Massachusetts) per capita. Tax benefit was highly concentrated, with 7% (n = 212) of hospitals accounting for half of the total amount. This study highlights the wide variation of nonprofit hospitals' tax benefit across states, its high concentration among a small number of hospitals, and the primary role played by state and local taxes. Policy efforts to strengthen nonprofit hospitals' taxpayer accountability are likely to be more effective when pursued at the local level. The detailed standardized estimation road map can be used by various stakeholders to estimate tax benefit for external valuation and reporting purposes, updated as laws change, and improved upon as better data sources become available.

Litigation risk and the cost of debt financing in M&As

In this paper, we use a semi-supervised machine learning technique, the word2vec word embedding model, to measure litigation risk for fixed-income issuers that use bond financing in primary market for mergers and acquisitions (M&As) in 28 countries. We investigate the relationship between the litigation risk and the offering yield of these securities, demonstrating that increased litigation risk increases financing costs. We analyze several ways to mitigate adverse effects, including the employment of more M&A advisors and assessing the legal environment in the issuing country. Our results are robust to an instrumental variable approach and alternative measures.

COVID-19 and redemptions from Irish-resident bond funds

This paper examines net redemptions from bond funds domiciled in Ireland at the onset of the COVID-19 pandemic. We analyse various empirical specifications to determine whether factors such as fund leverage, measures of liquidity, portfolio risk and portfolio concentration, among others, explain outflows from Irish-domiciled bond funds in March 2020. The findings indicate that funds with a larger share of short-term securities and riskier bond portfolios experienced higher redemptions. Our analysis also suggests that fund size and age are significant factors affecting outflows. When examining various sub-samples, we find evidence of more reactive behaviour among investors in actively managed funds compared to passively managed funds. We also find that retail bond funds demonstrate greater sensitivity to risk and leverage, while professional funds show evidence of lower risk aversion. These results provide insights that can help inform policymakers’ view of regulatory tools for market-based finance, a key priority internationally.

Gold, platinum, and mutual fund flows

Huang and Kilic (2019) demonstrate that gold to platinum price ratio (GP), which proxies for tail risk in the economy, is a priced risk factor in the cross-section of stock returns. We document that GP negatively affects the mutual fund flows of the active equity funds. In cross-sectional regressions, we find that funds with high betas with respect to the change in GP (βΔGP) have larger future fund flows, as such funds provide a hedge against economic distress. Further, βΔGP helps predict the future performance of the fund in the next few quarters. βΔGP also relates negatively to the downside risk of the fund, implying that funds could potentially reduce their left-tail risk by tilting towards securities with above average βΔGP. We also examine the flows to active corporate bond funds and passive funds. While these effects of GP are largely observable for passive funds, they are not as strongly observable for corporate bond funds.

The market timing ability of bond mutual funds

We apply the nonparametric methodology of Jiang (Journal of Empirical Finance 10:399–425, 2003) to examine whether bond mutual funds can time the bond market by adjusting their portfolios' market exposure based on anticipated market movement. This approach offers several advantages over the widely used regression-based tests such as Treynor and Mazuy (Harvard Business Review 44(4):131–136, 1966) and Henriksson and Merton (The Journal of Business 54(4):513–533, 1981). In a comprehensive study covering the USA, UK, and China, we find some evidence of positive market timing of bond funds at the individual fund level. On average, bond funds show neutral to slightly negative market timing abilities. After controlling for public information, we find that a smaller number of bond funds successfully time the market based on private timing signals. In terms of categories, we find strong evidence of positive market timing for Government bond funds as a group, consistent with the findings of Huang and Wang (Management Science 60:2091–2109, 2014).

ESG performance and cost of debt

We analyze China Securities Index Co., Ltd. (CSI) environmental, social and governance (ESG) scoring data, which incorporate Chinese characteristics, to assess the impact of ESG performance on corporate debt financing costs. Our findings indicate that better CSI ESG scores are correlated with lower debt financing costs. Additionally, improvements in local environmental execution enhance the effect of CSI ESG scores on debt financing costs. However, this effect diminishes with increased internal control quality and marketization. Governance has the greatest impact on reducing debt financing costs, followed by social and environmental factors. Superior CSI ESG scores reduce corporate debt financing costs by enhancing debt repayment capacity and reducing information asymmetry. Economic consequence analysis confirms that lower financing costs, driven by improved ESG performance, significantly enhance total factor productivity and firm value. CSI ESG scores also significantly impact bank loans but not corporate bond financing.

Monetary policy and fragility in corporate bond mutual funds

We document aggregate outflows from corporate bond mutual funds days before and after the announcement of increases in the Federal Funds Target rate (FFTar). To rationalize this phenomenon, we build a model in which funds’ net-asset-values (NAVs) are stale and investors strategically redeem to profit from the mispricing when they learn about the increases of FFTar. Consistent with the model’s predictions, we find that stale NAVs and loose monetary policy environments weaken (strengthen) outflows sensitivity to increases in FFTar during illiquid (liquid) market conditions. Our results highlight when and how monetary policy could systematically exacerbate the fragility of corporate bond funds.

Are bond markets and bank credits complementary or substitutable? Evidence based on the rule of law and countries’ legal origins

Bond and bank financing coexist despite their similarities as debt financing. I hypothesize that strengthening the rule of law in each country impacts corporate monitoring and firms’ financing preferences. I use panel data from 50 countries to analyze how the strength of the rule of law differs depending on countries’ legal origins. By using a regression model with an interaction term, I estimate marginal effects to determine if a stricter rule of law promotes bank or bond financing. The findings show that countries with common-law legal origins tend to have a stronger rule of law than civil law countries. A stronger rule of law increases bank lending but has a negative impact on bond issuance. This effect has a more significant impact in countries with Scandinavian legal origins and only a minor effect in countries with French legal origins. These differences can be attributed to how each country addresses agency problems, concerns regarding bank influence, and the availability of additional banking services.

Bond market access and corporate financing decisions: Evidence from a quasi-natural experiment

This study investigates how bond market access affects corporate financing decisions. Employing a difference-in-differences approach based on a reform in China and a sample of listed firms from 2010 to 2020, we find significant increases in bond issuance and bond financing for firms with high ex-ante equity costs. The effect is stronger for firms not audited by Big 4 auditors, having more negative news coverage, and exhibiting less conservative accounting practices. While increasing bond financing, firms decrease bank loans and leave debt ratios unchanged. Our findings indicate that firms hop among financing sources based on market accessibility and capital costs.

Impact of Flooding and Drought Risks on the Cost of Bond Financing for Water Utilities.

The global water cycle has experienced significant changes due to the interplay of climate shifts and human activities, resulting in more frequent and severe droughts and floods. These shifts have started to impact the operational efficiency of water treatment and delivery systems. This, in turn, has implications for the economic performance of these assets and the climate-impacted cost of their financing through the issuing of municipal bonds. Analyzing a decade of water bond data (2009-2019), this study offers empirical evidence for the impact of flood and drought risks on bond investor demand to offset water risks. The results reveal that bond markets factored in coastal flood risks between 2013 and 2019, adjusting by 3-6 basis points (bps) per risk score unit, and riverine flood risks from 2009 to 2013, with a 5-11 basis points increase per risk score unit. These effects were primarily driven by bonds issued in the Pacific Coast and Great Plains regions, respectively. In contrast, the pricing of drought risks in the bond market followed a more nuanced pattern. Additionally, we show the channeling effects of water consumption and investor perceptions of climate change on water risk pricing in the bond market. These findings have significant implications for water risk management in the public sector as regions with heightened water risk exposure are perceived as riskier by market participants, leading to a higher cost of capital for municipalities and water agencies.

Factors influencing the pricing of credit risk mitigation warrants in corporate bond financing

AbstractIn 2022, various Chinese regulatory authorities, including the China Securities Regulatory Commission (CSRC) and the State‐owned Assets Supervision and Administration Commission (SASAC), jointly issued documents and convened seminars at the Shanghai and Shenzhen Stock Exchanges to highlight the importance of credit protection tools, particularly credit risk mitigation warrants (CRMWs), to bolster corporate bond market financing. However, empirical research on the factors influencing CRMW prices in the Chinese market remains scarce. This study examines the factors affecting CRMW creation prices using a sample of CRMWs issued between 2018 and 2023 and analyzes the macroeconomic factors, characteristics of the underlying issuers, and related financial instruments. This study employs Shapley decomposition to evaluate the contribution of each variable. The findings reveal that, on the macroeconomic front, the year‐on‐year GDP growth rate from the previous quarter and the loan balance of financial institutions significantly and negatively impact CRMW prices. Regarding the underlying issuers, the issuer's credit rating and return on net assets significantly negatively affect CRMW prices, whereas the asset–liability ratio and issuer age have a significant positive impact. Additionally, related financial instruments such as bond interest rates and the risk mitigation certificate term positively contribute to the coverage of the underlying bond term and have a significant positive impact on CRMW prices.

Transaction Costs and Capacity of Systematic Corporate Bond Strategies

Can systematic corporate bond investments generate attractive returns net of costs? To answer this question, we apply the principle of market microstructure invariance and obtain bond transaction costs increasing in trade size. As the size of the bond fund increases, the market impact reduces net returns to zero. High-turnover strategies hit capacity constraints fast. Low-turnover credit risk–focused strategies have much higher capacities that can be further increased by constraining portfolio rebalancing in realistic ways. Transaction costs do not absorb the corporate bond risk premium even in the largest possible market portfolios.

Retraction Note: Energy financing for energy retrofit in COVID-19: Recommendations for green bond financing.

Retraction Note: Energy financing for energy retrofit in COVID-19: Recommendations for green bond financing.

Friendly Boards and the Cost of Debt

For a sample of public bond issues by U.S. firms between 2000 and 2019, sourced from the Securities Data Corporation (SDC) New Issues database, we examine the relationship between CEO-friendly boards and the cost of debt. To explore this relationship, we construct proxies for board friendliness based on social connections sourced from the BoardEx database, classifying a board as friendly if it includes at least one outside director who has a social connection with the CEO. Our regression analysis reveals a negative association between CEO-friendly boards and yield spreads and a positive association between CEO-friendly boards and credit ratings. These effects exist after controlling for firm and bond characteristics based on prior literature. The results are robust to an alternative measure of board friendliness and potential endogeneity. These findings imply that firms with a CEO-friendly board experience a lower cost of bond financing. This supports the argument that effective communication between CEOs and directors contributes to the enhancement of creditor interests. Our results carry a practical implication that firms heavily reliant on debt should actively employ CEO-friendly boards. Despite the burgeoning literature on CEO-friendly boards, there is a lack of research on the relationship between CEO-friendly boards and the cost of debt. Our results fill this gap in the extant literature on CEO-friendly boards.

The Aspire Social Impact Bond: How social impact bond financing can promote positive social and economic outcomes

AbstractFinancing human service delivery through social impact bonds (SIBs) is the subject of some critical commentary in the academic literature, but this tends to be largely theoretical rather than empirically based. This paper presents empirical evidence of how SIB financing can promote positive social and economic outcomes for governments, not‐for‐profit providers, individual service beneficiaries and society more broadly. The paper presents some of the results of an evaluation of the Aspire SIB, which financed an innovative intensive case management program providing housing and wraparound supports over a 3‐year period for people experiencing chronic homelessness. Aspire participants experienced significantly improved outcomes and decreased service needs, delivering downstream cost savings across several areas of government service delivery. This paper describes how the SIB financing mechanism underpinned the success of Aspire by promoting flexible, collaborative, outcome‐focussed and data‐informed responses to a challenging, multi‐faceted social problem.

Corporate climate risk and bond credit spreads

This study analyzes the impact of corporate climate risk on bond credit spreads using data from Chinese A-listed companies during 2007–2022. Utilizing textual analysis of annual reports, we construct firm-level climate risk indicators and identify a significant positive association between corporate climate risk and bond credit spreads, particularly for state-owned enterprises and high carbon-emitting companies. Mechanism analysis shows that heightened climate risk leads to higher operational risk and information opacity, indicating that greater investor compensation was required. These results provide new empirical evidence and insights into the factors influencing corporate bond financing costs.