Lower Yield Spreads Research Articles

The role of social capital in private placement: evidence from Rule 144A debt issuances

PurposeThe purpose of this paper is to investigate the role of social capital in the issuances of Rule 144A debt. Using a sample of 1,378 debt offerings from 1997 to 2015 in the US, this paper provides empirical evidence on whether and to what extent social capital affects the cost of Rule 144A debt.Design/methodology/approachThis paper employs a county-level measure of social capital and links social capital to the yield spreads of Rule 144A debt. A Heckman selection model is sued to address the sample selection bias, and an instrumental variable approach and propensity score matching methodology are implemented to deal with the potential endogeneity issue. The authors check for robustness using an alternative measure of social capital.FindingsThe results of the analysis provide evidence that issuers headquartered in the counties with higher levels of social capital experience lower yield spreads in their Rule 144A debt offerings. The findings are robust to a Heckman selection model, an instrumental variable approach and propensity score matching. Furthermore, the analysis reveals the marginal effect of social capital that the effect of social capital is more pronounced for the issuing firms with higher agency cost of debt and lower institutional ownership. The effect of social capital is more prominent after financial crisis.Originality/valueThis paper provides novel evidence of the effect of social capital on the cost of privately placed debt. The issuances of Rule 144A debt are subject to significant information asymmetry and are targeted at sophisticated institutional investors. This paper sheds further light on how institutional investors incorporate the regional social capital in their pricing scheme of private placement of Rule 144A debt.

Yield spread determinants of sukuk and conventional bonds

Despite increased economic turmoil over the past few years, the Islamic financial sector including sukuk has shown tremendous growth and stability. This study examines the yield spread determinants of sukuk and conventional bonds. We comparatively assess the effects of firm- and industry-specific variables, bond characteristics, and macroeconomic conditions on the yield. Our sample data features bonds and sukuk of different maturities issued by 58 publicly traded (listed) firms in Malaysia. For sukuk, primary determinants are the firm-specific indicators which indicate lower yield spreads. Moreover, sukuk spreads do not widen with equity volatility, making them less risky than conventional bonds. For conventional bonds, both firm-level and bond-specific characteristics significantly affect yield spreads. Higher financial leverage with shorter maturity is associated with low yields and low spreads. Findings in this study present new insights and important policy implications for investors trading in and regulators governing sukuk and conventional bonds.

The Rise of Covenant-Lite Bond Contracting

We investigate the trading and yield effects of covenant-lite (cov-lite) high-yield bond contracts, which have a restricted (lite) set of covenants. The excluded covenants often are those that use accounting performance measures. Although much research has focused on the potential benefits of accounting as a basis for debt contracting, little is known about settings where it may be optimal to exclude accounting performance statistics from public debt contracts. We find that cov-lite high-yield bonds have a higher trading turnover and lower yield spreads. Our findings provide empirical support for theory, which predicts, for optimal bond covenant design, that a trade-off between improving trading ease versus enhanced investor protection needs to be managed. These results enhance our understanding of the limits of accounting’s role in (bond) contracting design.

Benchmarking the Effects of the Fed’s Secondary Market Corporate Credit Facility Using Yankee Bonds

We use “Yankee” bonds, which are dollar-denominated bonds issued by foreign corporations but traded in the US, to benchmark the effects of the Federal Reserve’s Secondary Market Corporate Credit Facility (SMCCF). The SMCCF was established to purchase short-term, investment-grade bonds of US, but not foreign, corporations. Our tests apply a difference-in-differences technique to bond subsamples sorted by short- and long- maturities and AA, A, BBB, and BB credit ratings. Consistent with the SMCCF’s objective, we find that its announcement reduced the yield spreads on short-maturity US investment-grade bonds relative to the yield spreads on similarly-rated short-maturity Yankee bonds. Yet our results show that it also led to relatively lower yield spreads on US long-maturity AA- and A-rated bonds. Moreover, yield spreads on US BB-rated bonds actually rose relative to the spreads on their Yankee counterparts, indicating the SMCCF harmed these excluded bonds. Using the Amihud measure and bond-CDS basis as proxies for illiquidity, our analysis also shows that the SMCCF influenced both the illiquidity and default risk components of US bond yield spreads.

Is “Greenness” Priced in the Market? Evidence from Green Bond Issuance in China

Green bonds are bonds with a defined use of proceeds toward mitigating and adapting to climate change and solving environmental problems. Although the green bond market has expanded rapidly in recent years and has attracted great investment attention, whether investors can identify greenwashing behaviors remains a primary concern. This article takes advantage of the unique feature of the Chinese green bond market that allows a proportion of the proceeds to be used for non-green purposes. The authors find that greener bonds (more proceeds are used for green projects) are sold at a premium. This pricing differential is primarily driven by bonds whose proceeds are 100% used for green projects. The authors also show that green bonds verified by a third party have lower yield spreads and the effect is stronger for more reputable third parties. Overall, the results suggest that investors only reward fully green bonds and that investors can discern “greenwashing.” TOPICS:Portfolio theory, portfolio construction, ESG investing Key Findings • The authors measure greenness by the share of proceeds used for green purposes. • Within-sample comparisons show that there is a premium for greener bonds and the effects are concentrated in bonds that are 100% green. • Verified green bonds are sold at a premium, and the pricing differentials are more pronounced for more reputable verifiers.

Is 'Greenness' Priced in the Market? Evidence from Green Bond Issuance in China

Green bonds are bonds with a defined use of proceeds towards mitigating and adapting to climate change and solving environmental problems. While its market has expanded rapidly in recent years and attracted great investment attention, whether investors can identify greenwashing behaviors remains a primary concern. This paper takes advantage of the unique feature of the Chinese green bond market that allows a proportion of the proceeds to be used for non-green purposes. We find that greener bonds (more proceeds are used for green projects) are sold at a premium. This pricing differential is primarily driven by bonds whose proceeds are 100% used for green projects. Our results also show that green bonds verified by a third-party have lower yield spreads, and the effect is stronger for more reputable third-parties. Overall, our results suggest that investors only reward fully green bonds, and they can differentiate greenwashing.

Local religious beliefs and municipal bond market outcomes

AbstractThis study investigates whether religion‐induced risk aversion affects municipal bond market outcomes from 1990 to 2017. The results indicate that local government bonds issued from U.S. counties with a high Catholic‐to‐Protestant population ratio have lower credit risk ratings and lower yield spreads, and are less likely to have credit enhancement. The results stand up to additional tests. I control for issuer's county political party affiliation and state term limits, and continue to find significant effects. The effects are not driven by the issuer's county fiscal policies. Furthermore, the effects persist when I use an alternate specification that controls for omitted factors that are time invariant. Overall, my evidence suggests that a bond issuer's religion‐induced risk aversion plays a significant role in the pricing of local government bonds.

Index Membership and Capital Structure: International Evidence

We use the formation of new equity indexes and changes to index methodology to examine how shocks to firms' information environment affect their financing decisions. Firms added to an index are covered by more equity analysts, have greater news coverage, increased stock and bond liquidity, and lower yield spreads on newly issued debt. Treatment firms in our study increase their leverage by about two percentage points relative to control firms. This response is primarily in the more information-sensitive public debt market. We further show that the leverage response to index membership is more pronounced in countries with greater earnings opacity and poor disclosure standards. Our findings suggest that firms experiencing positive shocks to their information environment have improved access to external financing, primarily public debt.

Certification through Reputation of Credit Rating Agency: Evidence from Bond Yield in China

This paper provides primary evidence of whether certification via reputable Credit Rating Agencies (CRAs) is beneficial to issuers in the bond market in China. After considering the issuer-reputable CRA match, we find bonds rated by the most reputable CRAs to be associated with lower yield spread (higher bond price), revealing the investors’ recognition on the rating quality of reputable CRAs. This result is consistent with the traditional certification hypothesis and underlying reputation mechanism. We further find that information environment and issuer’s risk are two mechanisms through which certification effect works. We also find this certification effect is reinforced after the entry of China Credit Rating (CCR), a new independent CRA.

Do You See What I See? Transparency and Bond Issuing Costs

Using the staggered implementation of the Trade Reporting and Compliance Engine (TRACE) as a natural experiment, we show that bonds issued in a transparent environment receive higher prices (or equivalently pay lower yield spreads to benchmark US treasury bonds) relative to control bonds issued in the opaque, pre-TRACE environment. The yield spread on a typical pre-TRACE issuance of 132bps falls by 12bps following implementation of TRACE. We do not detect a significant effect on underpricing or fees and expenses paid in the issuing process. The main driver of the reduction in the cost of capital for bond issuers is the mitigation of information asymmetry rather than improved liquidity in the secondary market.

Do Bondholder Relations Efforts Pay Off for German Firms? An Empirical Approach

Zahlt sich Anleihekommunikation für deutsche Emittenten aus? Eine empirische Auswertung Diese Studie untersucht den Zusammenhang zwischen Unternehmenspublizität und Fremdkapitalkosten auf dem deutschen Markt für Unternehmensanleihen. Mit der steigenden Anzahl mittelständischer Anleiheemittenten wuchs in den letzten Jahren auch die Bedeutung von Transparenzüberlegungen in diesem Markt. Es unterliegt bis heute vor allem anekdotischer Evidenz, ob eine Verbesserung der Offenlegung von Marktteilnehmern wahrgenommen wird und sich folglich in geringeren Renditeaufschlägen niederschlägt. Ich verwende neben einem herkömmlichen Ranking-Index für Transparenz, wie sie von Aktienanalysten wahrgenommen wird, vor allem ein auf die Informationsbedürfnisse von Anleihegläubigern abzielendes Maß der Offenlegung über die Unternehmenswebseiten. Auf diese Weise kann ich die Beziehung zwischen eigentlicher Anleihekommunikation und einer Offenlegung, die in erster Linie an die Aktionäre gerichtet ist, bewerten. Mit einer erschöpfenden Auswahl an unternehmens- und anleihespezifischen Kontrollvariablen ist es mir möglich, einen stark negativen Zusammenhang zwischen Offenlegung und Fremdkapitalkosten auf dem deutschen Anleihemarkt, welcher fast unabhängig von der verwendeten Ranking-Variable ist, nachzuweisen. Robustheitsschätzungen bestätigen, dass die Ergebnisse kaum von Endogenität beeinflusst sind.

Corporate social responsibility and the cost of corporate bonds

This study examines how a firm’s corporate social responsibility (CSR) performance is associated with the cost of its new bond issues. Using credit ratings as an ex ante cost of debt, we find that better CSR performance is associated with better credit ratings. After controlling for credit ratings, our results show that better CSR performance is associated with lower yield spreads but some of the effect is absorbed by credit ratings. When we examine CSR strengths and concerns separately, we find that a higher CSR strength (concern) score is associated with lower (higher) yield spreads. Our results on the effect of firm performance on seven individual CSR dimensions are generally consistent with our main findings. Our results indicate that firms with better CSR performance are able to issue bonds at lower cost and that both CSR strengths and concerns are considered by bondholders. Additional subsample test results suggest that the association between CSR performance and bond yield spreads is more pronounced in investment-grade and non-Rule 144a bonds, for financially healthier bond issuers, for issuers with weaker corporate governance and higher information asymmetry, and for issuers operating in environmentally sensitive industries.

Does financial statement information affect cross-border lending by foreign banks in the syndicated loan market? Evidence from a natural experiment

We examine whether cross-border lending in the syndicated loan market is affected by an exogenous change in accounting standards comparability through a natural experiment based on the mandatory adoption of International Financial Reporting Standards (IFRS) across Europe. Existing studies on the economic consequences of IFRS in the debt market do not reveal whether the impact is caused by changes in accounting quality or comparability, and this literature has so far produced mixed findings on the effect of IFRS. We show that foreign banks offer IFRS-reporting corporate borrowers a larger loan share, a lower yield spread, and a longer loan maturity only when the banks are themselves domiciled in countries that mandate IFRS. Our findings imply that it was the improvement of financial statement comparability after international accounting harmonization, rather than the enhancement of accounting quality under IFRS, that reduced the information disadvantage for foreign banks and encouraged cross-border lending after mandatory IFRS adoption.

The Impact of Corporate Social Responsibility Disclosure and Performance on the Cost of Corporate Bonds

This study examines how a firm’s corporate social responsibility (CSR) performance is associated with the cost of its new bond issues. Using credit ratings as an ex ante cost of debt, we find that better CSR performance is associated with better credit ratings. After controlling for credit ratings, our results show that better CSR performance is associated with lower yield spreads but some of the effect is absorbed by credit ratings. When we examine CSR strengths and concerns separately, we find that a higher CSR strength (concern) score is associated with lower (higher) yield spreads. Our results on the effect of firm performance on seven individual CSR dimensions are generally consistent with our main findings. Our results indicate that firms with better CSR performance are able to issue bonds at lower cost and that both CSR strengths and concerns are considered by bondholders. Additional subsample test results suggest that the association between CSR performance and bond yield spreads is more pronounced in investment-grade and non-Rule 144a bonds, for financially healthier bond issuers, for issuers with weaker corporate governance and higher information asymmetry, and for issuers operating in environmentally sensitive industries.

Corporate governance and the cost of debt: Evidence from director limited liability and indemnification provisions

We find that firms that provide limited liability and indemnification for their directors enjoy higher credit ratings and lower yield spreads. We argue that such provisions insulate corporate directors from the discipline from potential litigation, and allow them to pursue their own interests by adopting low-risk, self-serving operating strategies, which coincidentally redound to the benefit of corporate bondholders. Our evidence further suggests that the reduction in the cost of debt may offset the costs of directorial shirking and suboptimal corporate policies occasioned by this insulation, which may explain why stockholders have little incentive to rescind these legal protections.

Political rights and the cost of debt

We examine the impact of country-level political rights on the cost of debt for corporate bonds issued by firms incorporated in 39 countries. Similar to, but separate from, the relation for creditor rights, greater political rights are associated with lower yield spreads. A one standard deviation increase in political rights is associated with an 18.6% decline in bond spreads. We find evidence that political and legal institutions are substitutes; marginal improvements in political rights produce greater reductions in the cost of debt for firms from countries with weaker creditor rights. We examine potential factors through which political rights may affect the cost of debt and find that greater freedom of the press provides an important channel for reducing bond risks. Moreover, debt of firms with cross-listed equity trades at a premium in U.S. markets, but this relation appears to be more consistent with improved visibility than with bonding effects.

An empirical analysis of the determinants and pricing of corporate bond clawbacks

This paper presents empirical analysis of the factors that affect a firm's decision to use a clawback provision in debt and the yield impact of including the clawback provision. The results show that relatively smaller firms with low credit rating and low profitability favor the usage of clawback provisions. We also find that debt with clawback provisions have the highest yield spread followed by callable bonds and straight debt. Convertible bonds that offer investors the option to convert to equity have lower yield spread. This implies that issuers can trade off flexibility for higher interest cost and that the clawback feature may be a significant financial innovation which reduces information asymmetry and creates an entry point for small firms to gain access to the public bond markets.

The Impact of Auditor-Related Tax Services on Corporate Debt Pricing

ABSTRACT: We examine the link between auditor-related tax services and corporate debt pricing. After controlling for security-level and other firm-level determinants, we provide strong, robust evidence that bondholders reward public firms that pay proportionately more tax fees to their auditor with lower yield spreads. Our results include that the influence of auditor-related tax services on lowering borrowing costs is stronger for issues made by firms suffering worse information asymmetry. This research, which helps to resolve whether audit quality hinges on the relative amount of tax services, may have important policy implications given that regulators continue to debate whether to impose further restrictions on the tax services that auditors can provide to their clients. Altogether, our evidence implies that the benefit of tax services in improving auditor knowledge—stemming from public accounting firms learning more about their clients over successive engagements—outweighs any concurrent sacrifice in auditor independence in shaping debt market perceptions.

Political Rights and the Cost of Debt

We examine the impact of country-level political rights on the cost of debt for corporate bonds issued by firms incorporated in 39 countries. Similar to, but separate from, the relation for creditor rights, greater political rights are associated with lower yield spreads. A one standard deviation increase in political rights is associated with an 18.6% decline in bond spreads. We find evidence that political and legal institutions are substitutes; marginal improvements in political rights produce greater reductions in the cost of debt for firms from countries with weaker creditor rights. We examine potential factors through which political rights may affect the cost of debt and find that greater freedom of the press provides an important channel for reducing bond risks. Moreover, debt of firms with cross-listed equity trades at a premium in U.S. markets, but this relation appears to be more consistent with improved visibility than with bonding effects.

Credit spreads in the market for highly leveraged transaction loans

This paper is an empirical exploration of the determinants of the required credit spreads on highly leveraged transaction (HLT) loans. The analysis uses a multi-factor spread model to estimate the movement of loan spreads relative to spreads required in the (competing) corporate bond market as well as the significance of loan-specific characteristics in determining loan spreads. The empirical estimates are based on the Loan Pricing Corporation's database which consists of over 4000 loan transactions between 1987 and 1994. We find a positive HLT loan spread sensitivity to changes in spreads in the corporate bond market, but this sensitivity is significantly less than unity; indicating that the HLT loan market and high yield public debt market are not fully integrated. Furthermore, there is evidence that lenders augment, rather than substitute, loan yield spreads with additional fees for syndication, commitment and cancellation risks. In general syndicated loans have lower yield spreads than other HLT loan types.