Restrictive bond covenants: Evidence from family firms in China

Researchers and regulatory authorities are paying growing attention to the protection of creditors' interests against potential infringement by major shareholders in the Chinese bond market. In particular, family firms have come under increased scrutiny given the typically large, concentrated ownership position of the controlling family members. While family firms have been well-examined in most Western countries, there is little research to date on family firms in China – a research gap that is concerning given the growing importance of China's debt markets on a global stage and the recent bankruptcy wave surrounding Chinese bond issues. This study aims to close this gap by examining the impact of family control on the number of restrictive covenants in corporate bond contracts issued by Chinese companies. Based on a sample of over 1100 bonds issued between 2009 and 2021, we find that corporate bonds issued by Chinese family firms contain a larger number of restrictive covenants than those issued by non-family firms – a result that is in contrast with previous findings for the United States. Furthermore, the impact of family control on the number of restrictive covenants is more pronounced in bonds issued by companies with higher social capital control, lower investment efficiency, and higher financing constraints. A mechanism analysis reveals that relative to non-family firms, the shareholders and managers of family companies are more prone to collusion and exhibit a higher degree of separation of rights; this increases the risk to creditors' financial interests and raises their requirement for restrictive covenants. Finally, we present evidence to suggest that improving the level of internal governance and external supervision of firms can help to reduce the impact of family control on the number of restrictive covenants.