Bond Returns Research Articles

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.

Methods of long-term planning of corporate financing

The questions on long-term planning of an enterprise’ bonded loan interest rate payments have been studied. The methods have been considered and the classification of methods for planning the bonds interest rate proposed. Several groups of such planning methods have been singled out. The analysis of application of bond interest rate planning methods applied by enterprises of different national industries has been made. The analysis has been carried out in the spheres of mechanical engineering, generation, transmission and sales of electric power, ferrous metals production, transportation and logistics, foodstuffs production, and information transmission provision. Corporate bond issues issued between 2015 and 2020 have been analyzed. As a result, the three methods most frequently used by enterprises in planning bond interest rates have been identified: methods of considering the macroeconomic risk of an organization; methods of considering the combination of macroeconomic and individual risk of an organization; methods based on market analysis. The study of the mentioned methods allowed us to propose a method of planning the bond interest rate, which calculates the weighted average of the forecast bond interest rate. To assess the quality of the proposed method, it has been tested. The article concludes that it can be used at enterprises planning to issue their own bonded loans.

Minibond and earnings management: leveraging the signaling effect of minibond listing

AbstractMinibonds are a hybrid between bank debt and bond issuance introduced in Italy to expand the range of possible financing resources available to unlisted enterprises. This peculiar debt security was introduced as part of a regulatory reform in 2012 to diversify funding sources and facilitate access to capital markets for Small and Medium Enterprises (SMEs). In this study, we investigate whether firms that decide to issue and list a minibond engage in earnings management (EM) to leverage the growth-signaling effect generated by the listing of this security. Listing bonds on a financial market is not mandatory, but a strategic choice. Collecting a sample of 136 minibond listings during 2013–2020, we use panel analysis to show that issuers tend to manage their earnings in the year of listing. We argue that this behavior is undertaken in order to provide a better representation of their economic and financial situation and consequently to better impress current or future stakeholders. Moreover, we also find that larger minibond size partially discourages EM, thus confirming the role of debt as a means of control over management. Overall, we argue that stakeholders should be aware that, even though minibond issuers are sound firms on average, they tend to inflate their earnings in the year of listing in order to reinforce the signaling effect of the quotation.

The aftermath of covenant violations: Evidence from China's corporate debt securities

We document a sharp and persistent decline in bond issuances following covenant violations also called technical defaults. However, we find no evidence that firms’ investment and performance change after technical defaults. Furthermore, we document that most of the technical defaults are waived off by bondholders through the debenture holders’ meetings. Although covenants serve as tripwires for renegotiation between bond issuers and investors, control rights are rarely transferred from shareholders to bond investors following technical defaults.

Central Bank Operations Under Foreign Exchange Accumulation: The Case of the Macedonian Central Bank (2005–2022)

ABSTRACT The present article analyses the balance sheet composition and the evolution of the operational framework of the Macedonian central bank. It shows that the compensating movements on its balance sheet could not be attributed exclusively to domestic liquidity management operations, as in the absence of substantial foreign currency inflows, the central bank has increased foreign reserves through the proceeds arising from the issuance of government bonds denominated in foreign currency on international financial markets. Despite retaining some of the characteristics of a currency board, the absence of a strict commitment to such a regime has allowed the central bank to employ a range of instruments of domestic liquidity management and to maintain relatively tight control over its policy rate. The level of the policy rate under a rigidly fixed exchange rate parity meant to be sustained over time, would however continue to depend on the ability of the authorities to ensure a sufficient level of foreign exchange reserves.

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.

GDP-linked bonds as a new asset class

Using stochastic spanning tests without any distributional assumptions on returns, we show that the two classes of GDP-linked bonds, floaters and linkers, are not spanned by a broad benchmark set of stocks, bonds, and cash for a wide range of design specifications. Thus, they provide a new asset class with significant diversification benefits for investors, with proportional investments to these novel instruments estimated in the double digits and an increase in Sharpe ratios by up to 0.37 over the benchmark. The benefits depend on the market risk premium, but they persist for a wide range of premia estimates from existing literature and are robust to a randomized test. Using the generalized method of moments regressions, we document the finance and macro determinants of GDP-linked bond returns.

Mobilizing Firms for Climate Action: Paris Climate Agreement and Corporate Green Bond Issuance

Mobilizing Firms for Climate Action: Paris Climate Agreement and Corporate Green Bond Issuance

The first public offering of a corporate bond issuance and the expected impact on the securities market and economy in Albania

This study aims to investigate the anticipated importance of the inaugural corporate bond issuance through public offering on the Albanian Stock Exchange (ALSE) and its potential ramifications for the bond market, investors, the broader financial sector, and the Albanian economy. Given that the ALSE has been predominantly characterized by government bonds, the initial public offering of the first corporate bond represents a noteworthy landmark that could facilitate the advancement of the Albanian financial market. We will scrutinize how this progression may result in heightened market liquidity, by appealing to both domestic and international investors, thereby increasing the aggregate trading volume and liquidity, within the exchange. Additionally, we will deliberate on the function of corporate bonds in diversifying the array of financial instruments accessible on the ALSE, which may assist in risk mitigation and the cultivation of a more stable financial environment. Moreover, we will analyze how the issuance of corporate bonds could promote superior corporate governance practices, culminating in increased transparency, more rigorous financial reporting, and bolstered investor confidence. Finally, we will contemplate the potential of corporate bond issuances to stimulate economic growth by supplying companies with an alternative avenue of funding for expansion and investment initiatives. This can result in job generation, enhanced productivity, and comprehensive economic development in Albania. By examining the anticipated consequences of the first corporate bond issuance on the ALSE, this study will illuminate the potential advantages and challenges associated with this development, laying the groundwork for future inquiries as the market undergoes further evolution.

The Impact of Financial Stress and Uncertainty on Green and Conventional Bonds and Stocks: A Nonlinear and Nonparametric Quantile Analysis

This study aims to investigate the impact of financial stress and uncertainty on the returns of green and conventional bonds and stocks in the United States from 2010 to 2022. The research utilizes nonlinear and nonparametric analysis, which includes the quantile-on-quantile and nonparametric causality-in-quantiles approaches to examine the relationship between variables. The data analyzed using R programming language show that financial stress positively impacts the middle quantiles of both conventional and green equity, while financial uncertainty negatively impacts upper quantiles. The study also finds that financial stress has a more significant impact on all types of bonds compared to financial uncertainty, with conventional bonds being more affected. This study proposes a pyramid that classifies financial assets based on their susceptibility to financial stress, which could help investors evaluate risk levels and make better investment decisions. The study recommends that policymakers should encourage green investments by offering incentives, such as tax credits. They should also focus on enhancing the efficiency of volatile assets by implementing new investment rules and regulations.

The Effect of Institutional and Shariah Governance on Sukuk and Bond Performance in Asian Region

Purpose: This study investigates the influence of shariah and institutional governance on the performance of sukuk and bonds in the Asian landscape, particularly Malaysia and Indonesia. It aims to unravel the impact of Shariah principles and various aspects of institutional governance (IG) indicators; hence offering a deeper understanding of sukuk and bond performance. Method: Data was collected from 34 companies in Asian region. The study developed and validated the SG index using principle component analysis. Results and Discussion: The findings from panel regression analysis showed that Shariah and institutional governance improve sukuk performance. In addition institutional governance affected bond performance. Indicators of IG affected positively sukuk issuance and return. However, only government effectiveness and rule of law affected the bond issuance. All the indicators affected bond return except voice and accountability. Implications of the Research: The study contributed to the literature by examined both type of governance and compared between their effects. It also developed an SG index for financial and non-financial companies. Improving Shariah governance and institutional governance will enhance sukuk and bond performance. Originality/value: The study contributed to the knowledge by developing an index of shariah governance for financial and non-financial organization.

How do the Green Energy Stocks React to Green Bond Issuances?

Achieving sustainable development is one of the main issues at the global level and both public and private sector enterprises need to make large – scale investments to fight against climate change. In this respect, green bonds gain importance to raise money for environmentally – friendly projects, especially clean energy. Proceeds from green bonds are earmarked towards financing of investments that have positive environmental impacts. This paper explores the relationship among green bond issuances and stock market reaction with special focus on renewable energy firms. Herein, through a dataset of green bond issuance announcements worldwide by 46 unique firms over the period from 2014 to 2023, we investigate how the share prices respond to such announcements using event – study methodology. From the empirical evidence of the downward stock price movements, we suggest that investors react negatively to the announcement of green bond issuances. In other words, we find significant and negative cumulative average abnormal returns (CAAR) across all the event windows except in the window of [0, 10], meaning that our findings are robust to several alternative event windows. Further, we determine that the share price response, in general, does not differ depending on the use of green bond proceeds and the years.

Do investors reward sovereign catastrophe bond issuance? Evidence from a panel of 26 disaster-prone countries

Do investors reward sovereign catastrophe bond issuance? Evidence from a panel of 26 disaster-prone countries

The Effect of Green Bonds on Natural Capital Protection: Worldwide Evidence

The continued destruction of nature, including the degradation of natural capital and biodiversity, threatens ecosystem services and human well-being. Natural capital is crucial for providing the conditions necessary for human survival and ecosystem services. Without protecting natural capital, this degradation will have lasting effects on current and future generations. Existing studies increasingly show that Green Bonds can finance environmental projects effectively, but few have examined their impact on natural capital protection. This study investigates the effect of Green Bonds on natural capital protection globally, using IMF Climate Data and World Bank data from 2019 to 2022. By applying the Green Investment theory and quantile-panel regression analysis, the results show that Green Bonds significantly enhance natural capital protection at the 25th and 50th percentiles. This indicates that countries can improve their natural capital protection through the issuance of Green Bonds. Moreover, the study finds that renewable energy positively correlates with natural capital protection, while population growth and total natural resource rents have negative impacts. Hence, this study recommends that governments prioritize the issuance of Green Bonds to fund environmental initiatives.

How does the issuance of green bonds impact stock price crash risk: An analysis utilizing the NCSKEW and DUVOL

China's rapid development in the context of carbon neutrality has positioned it as the global leader in green bond issuance. As the Chinese A-share market continues to slump, adverse shocks are accumulating. Thus, the question arises: How will the issuance of green bonds (GB) impact stock price crash risk (SPCR)? The present study utilizes datasets of Chinese A-share listed firms from 2012 to 2022 and conducts a differences-in-difference analysis to address this inquiry. The findings indicate that issuing GB can significantly reduce SPCR, suggesting that GB plays a stabilizing role in the capital market. This effect remains robust after consideration of parallel trend testing, placebo tests, propensity score matching, replacement of explained variables, and controlling for geographic and industrial factors. The mechanism studies demonstrate that the issuance of GB can effectively alleviate financing constraints faced by companies and reduce SPCR through the financing constraints mechanism. The issuance can also enhance firm exposure and attract investor attention, thereby mitigating SPCR through the investor attention mechanism. The issuance contributes to the formation of a positive reputation image among investors and can diminish SPCR through the investor sentiment mechanism. The heterogeneity analyses show that the depressive effect of issuing GB on SPCR is more pronounced in state-owned enterprises, heavily polluting industries, and regions with a higher degree of marketization. Further discussion suggests that given the influence of externalities, the green signals released when a firm issues GB can spread within the capital market, generating a positive spillover effect on the decrease in SPCR of other firms in the same region and a negative spillover effect on the increase in SPCR of other firms in the same industry. This study not only confirms GB's stabilization role in the capital market, but also offers theoretical insights for improving the institutional design of the green bond market and promoting sustainable green development.

Greenwashing in green finance and measures to prevent it

Aim. To study the phenomenon of greenwashing in the spheres of green bonds issuance and banks’ activities.Objectives. To show the degree of study of the problem in foreign and Russian scientific literature; to analyze the methods of combating greenwashing; to estimate the probability of greenwashing in the financial sphere in Russia.Methods. The author used the methods of bibliographic analysis, studied the legislation and documentation of banking organizations in the context of greenwashing prevention.Results. The author traces the growth of cases of greenwashing in the financial sphere, shows the main forms of its manifestation emphasized in modern scientific literature. As a result of the analysis of the European Union (EU) legislation on counteraction to financial greenwashing the ineffectiveness of the EU measures on prevention of unfair behavior of issuers of “green” bonds and banking institutions is proved. The analysis of the Russian practice of green finance shows the low demand for the services of green bond verifiers and the low degree of state control over this sphere, which may affect the spread of financial greenwashing in Russia. Based on the results of the analysis of the sphere of counteraction to greenwashing in the sphere of green finance in Russia, the main directions of improvement of the domestic policy of counteraction to greenwashing are proposed.Conclusions. Greenwashing is an urgent problem for the development of green finance. The measures taken by the EU to regulate the green bond market do not lead to a reduction in greenwashing and even provoke its development. Measures on state control and tougher penalties for greenwashing are more effective than the emphasis on information disclosure. This seems significant not only for the European market, but also for the Russian market, which will have to face this problem. It is necessary to develop measures to detect and overcome unfair behavior of participants of Russian financial markets, including the development of state control mechanisms, a unified methodology for assessing green bonds and issuers’ reporting, as well as the responsibility of issuers and verifiers when greenwashing is detected. Equally important are incentives for banks to finance green projects and control of the banking system in the framework of greenwashing prevention.

Corporate foreign bond issuance and interfirm loans in China

We use firm-level data to analyze international bond issuance by Chinese non-financial corporations, distinguishing those by sectors classed as ‘risky’. Dollar issuance is positively correlated with the differential between domestic and foreign interest rates, and this effect is particularly strong for firms in risky sectors. Strikingly, firms in risky sectors use the proceeds to do more interfirm lending than firms in non-risky sectors. Moreover, this lending rose significantly after the authorities sought to restrict the financial activities of risky sectors in 2008–09. Firms in risky sectors compound risk by engaging in speculative activities that mimic the behavior of financial institutions while escaping prudential regulation.

The Influence of CEO Characteristics On Environmental, Social, & Governance (ESG) Strategies In Non-Financial Sector Companies Listed On The Indonesian Stock Ex-change (IDX)

Global issues such as climate change, social injustice, and corporate misconduct have driven the emergence of the Environmental, Social, & Governance (ESG) concept as the foundation of business and investment strategies. While Indonesia has been a pioneer in ESG bond issuance, further steps are still needed to support national policies and ensure alignment with ASEAN and G20 goals in supporting sustainable finance. This study aims to determine the effect of CEO characteristics, namely Gender and Education, on the Environmental, Social, & Governance (ESG) of companies listed on the Indonesia Stock Exchange (IDX). The literature shows that Gender, Education, and CEO Experienxe affect the company's funding policy and capital structure, but the impact on ESG implementation is unclear. This study used a sample of 365 with a total of 73 companies. The data processing method used is panel linear regression analysis using RStudio software. The results showed that CEO gender has an insignificant positive effect, CEO education has a significant positive effect, and CEO experience has a significant negative effect on the ESG strategy score. The results of the study are expected to help companies in making policies to improve ESG and help investors in choosing ESG companies.

The role of central bank communication in the long-term stock-bond correlations: Evidence from China

In this paper, we extend the traditional DCC-MIDAS-X model by incorporating the central bank communication sentiment indicator to examine its effect on the long-term correlations between stock and bond returns. Our results show that positive central bank communication can reduce stock-bond correlation. The effect changes over time depending on the state of the economy, which is significant during upturns but not noticeable during recessions.