Corporate Fraud and Corporate Bond Costs: Evidence from China

Min Zhang, Guangming Gong, Si Xu and Xun Gong

Emerging Markets Finance and Trade, 2018, vol. 54, issue 5, 1011-1046

Abstract: This study investigates the relationship between corporate fraud and four typical components of costs associated with corporate bonds. Based on data from a booming corporate bond market in China, we confirm that fraudulent issuers have higher corporate bond costs. Specifically, they are more likely to push upward price revisions, pay higher issue fees and coupon spreads, and encounter larger underpricing after issuance. Moreover, we demonstrate that severe corporate fraud is also significantly related to the costs of corporate bonds. Furthermore, we find that investors pay more attention to fraud in accounting information and disclosure. These results remain robust to a strand of endogeneity and through the robustness tests. In additional research, we find that bonds issued by fraudulent firms tend to receive lower ratings and show inferior performance after issuance. We also demonstrate that the effects of corporate fraud on bond costs erode as time passes, although the mitigation speed is slow. Finally, we find that hiring reputable financial intermediaries can partially mitigate the negative effects of corporate fraud.

Date: 2018
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DOI: 10.1080/1540496X.2017.1411256

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