Bond Covenants and the Cost of Debt: Evidence from China

Guangming Gong, Si Xu and Xun Gong

Emerging Markets Finance and Trade, 2017, vol. 53, issue 3, 587-610

Abstract: We examine how the use of covenants in the bond contract affects the cost of debt by using a sample of Chinese firms. We find that (1) the use of financing-related and asset-sale covenants is negatively associated with the cost of debt; (2) the negative relations between financing-related and asset-sale covenants and the cost of debt are more pronounced when a firm’s agency conflict is severe or accounting quality is high; (3) the negative relations between financing-related and asset-sale covenants and the cost of debt are significantly intensified if the issuer is a state-owned enterprise (SOE).

Date: 2017
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DOI: 10.1080/1540496X.2015.1095568

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