Issuing bonds during the Covid-19 pandemic: Was there an ESG premium?

We rely on the ESG ratings assigned by four distinct agencies (MSCI, Refinitiv, Robeco, and Sustainalytics) to study the link between ESG scores and firms’ cost of debt financing during the Covid-19 pandemic. We document the existence of a statistically and economically significant ESG premium, i.e. better rated companies access debt at a lower cost. Despite some differences across rating agencies, this result is robust to additional controls for the issuer’s credit standing as well as several bond and issuer’s characteristics. We find that this effect is mainly driven by firms domiciled in advanced economies, whereas creditworthiness considerations prevail for firms in emerging markets. Lastly, we show that the lower cost of capital for highly rated ESG firms is explained both by investors’ preference for more sustainable assets and by risk-based considerations unrelated to firms’ creditworthiness, such as exposure to climate change risks.     

Local guarantees and SOE bond pricing in China

We study the changing landscape of credit market guarantees by examining the risk-pricing of the Chinese state-owned enterprise (SOE) bonds, which have experienced rising defaults across provinces from a zero record. Using primary market bond issuance data, we identify a province premium that captures the perceived local government support for local SOEs. We find that on average the perceived local government support is on the decline, while the subnational debt market has become more segmented since 2018. This evidence is found to be closely related to the divergence in local government’s fiscal space and the occurrence of SOE default incidents in the area, highlighting the adverse linkage between public debt and corporate financing costs.     

Callable or convertible debt? The role of debt overhang and covenants

We analyze what role debt overhang and covenants have in a manager’s choice between issuing callable or convertible debt when a firm needs to issue a substantial amount of debt. Callable bonds provide a higher coupon in exchange for a repurchase option. Convertible bonds offer bondholders the option to exchange debt to equity. Using a dynamic capital structure model with investment choice, we find that callable debt implies a larger debt overhang friction, and for highly leveraged firms convertible debt is preferred. Moreover, if outstanding bonds have net-worth covenants attached, callable bonds are more likely to be issued. Our empirical findings support the theory.     

Confucian culture and corporate bond pricing

We investigate the effect of Confucian culture on corporate bond pricing. Using the birthplace data of 56,759 Jinshi in the Ming and Qing dynasties to construct a proxy of Confucian culture, we find a significantly negative relation between Confucian culture and bond pricing: the stronger the Confucian atmosphere of the corporate headquarters’ location, the higher the bond rating and the lower the credit spread. This conclusion still holds after using the distance to the nearest ancient printing office as an instrumental variable and a series of robustness tests. The mechanism test shows that Confucian culture can improve the pricing efficiency of corporate bonds by fostering investors’ trust, alleviating principal–agent problems and restraining bad corporate behaviors. Moreover, the impact of Confucian culture on corporate bond pricing is greater for firms located in regions with weak legal and other formal institutional constraints and for unlisted companies. Our study complements the literature on culture and bond pricing, and provides policy insights from traditional Chinese wisdom for improving the efficiency of financial markets.     

Do green financial policies offset the climate transition risk penalty imposed on long-term sovereign bond yields?

Asset valuations in high-carbon sectors face significant corrections due to climate risks. This paper specifically analyses whether markets impose a penalty on long-term sovereign bonds issued by countries facing higher climate-related transition risk while rewarding those that have implemented green financial policies to mitigate these risks. We find that higher carbon dioxide emissions and a lower sustainable development score (both proxies for transition risks) lead to an increase in long-term sovereign bond yields. However, the presence of green financial policies appears to offset this climate transition risk premium.     

Oil price uncertainty and the cost of debt: Evidence from the Chinese bond market

This paper explores the impact of oil price uncertainty affects the cost of debt in China. By analyzing the bond data from 2008 to 2019 in China, we find that oil price fluctuation boost bond offering spread, denoting that oil price uncertainty may increase the cost of debt. This increase is likely due to higher default risks resulting from the heightened oil price uncertainty. Moreover, non-state-owned firms and those in the energy industry are more susceptible to the effects of oil price volatility. Our findings also reveal an asymmetric effect of oil price uncertainty on the cost of debt, with a stronger impact observed from positive uncertainty compared to negative uncertainty. This study contributes to the current understanding of the ways in which oil price uncertainty impacts the cost of debt in an emerging country.