IDEAS home Printed from https://ideas.repec.org/a/gam/jijfss/v11y2023i4p126-d1270987.html
   My bibliography  Save this article

Bond Issuance as Reputational Signal: Debunking the Negative Perception of Additional Liability

Author

Listed:
  • Dachen Sheng

    (International College of Liberal Arts, Yamanashi Gakuin University, 2-4-5 Sakaori, Kofu 400-8575, Yamanashi, Japan
    Department of Business & Economics, International Christian University, 3-10-2 Osawa, Mitaka 181-8585, Tokyo, Japan)

  • Heather A. Montgomery

    (Department of Business & Economics, International Christian University, 3-10-2 Osawa, Mitaka 181-8585, Tokyo, Japan)

Abstract

This paper examines the determinants of bond issuance in the Chinese market and the influence of capital structure—in particular direct debt finance—on firm performance and the cost of debt. The results reveal that institutional factors in the Chinese market, in particular the involvement of the financial authority permission process during bond issuance, enhance the credibility of firms that are able to successfully issue bonds. Empirical analysis of Chinese listed manufacturing firms over the period from 2010 to 2021 demonstrates that firms with higher outstanding levels of bonds perform better and face lower costs of both bond and nonbond direct finance. We interpret this as bond issuance approval serving as a signal to markets of an implicit government guarantee on firms that are approved to issue bonds. The agency problem is analyzed using propensity-score matching and Logit analysis, revealing a trade-off between the principal–agent conflict and conflicts of interest among different shareholders when power is very concentrated through CEO duality: the CEO simultaneously serves as the chairman of the board. In large firms, as measured by total assets, the cost-reducing effect of the principal–agent problem being mitigated by CEO duality outweighs the agency costs arising from conflicts of interest between large and small shareholders, leading to an increased likelihood of successful bond issuance. However, in large firms, as measured by market capitalization, where share ownership is likely more diversified, this effect diminishes. In conclusion, this paper posits that policymakers ought to investigate strategies for granting preferential treatment to high-growth, small to mid-sized enterprises, enabling them to secure funding through direct debt financing.

Suggested Citation

  • Dachen Sheng & Heather A. Montgomery, 2023. "Bond Issuance as Reputational Signal: Debunking the Negative Perception of Additional Liability," IJFS, MDPI, vol. 11(4), pages 1-19, October.
    • Handle: RePEc:gam:jijfss:v:11:y:2023:i:4:p:126-:d:1270987
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2227-7072/11/4/126/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2227-7072/11/4/126/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Jensen, Michael C & Meckling, William H, 1979. "Rights and Production Functions: An Application to Labor-managed Firms and Codetermination," The Journal of Business, University of Chicago Press, vol. 52(4), pages 469-506, October.
    2. Eduardo Borensztein & Lei Sandy Ye, 2021. "Corporate debt overhang and investment in emerging economies: Firm‐level evidence," International Finance, Wiley Blackwell, vol. 24(1), pages 18-39, April.
    3. Ge, Yao & Liu, Yangshu & Qiao, Zheng & Shen, Zhe, 2020. "State ownership and the cost of debt: Evidence from corporate bond issuances in China," Research in International Business and Finance, Elsevier, vol. 52(C).
    4. repec:bla:jfinan:v:43:y:1988:i:1:p:1-19 is not listed on IDEAS
    5. Guanqun Tong & Christopher Green, 2005. "Pecking order or trade-off hypothesis? Evidence on the capital structure of Chinese companies," Applied Economics, Taylor & Francis Journals, vol. 37(19), pages 2179-2189.
    6. Castanias, Richard, 1983. "Bankruptcy Risk and Optimal Capital Structure," Journal of Finance, American Finance Association, vol. 38(5), pages 1617-1635, December.
    7. Berger, Allen N, 1995. "The Profit-Structure Relationship in Banking--Tests of Market-Power and Efficient-Structure Hypotheses," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 404-431, May.
    8. Sam Mensah & Joshua Yindenaba Abor, 2014. "Agency Conflict and Bank Interest Spreads in Ghana," African Development Review, African Development Bank, vol. 26(4), pages 549-560, December.
    9. Myers, Stewart C, 1984. "The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    10. Stewart Myers & John McConnell & Alice Peterson & Dennis Soter & Joel Stern, 2023. "Vanderbilt university roundtable on the capital structure puzzle," Journal of Applied Corporate Finance, Morgan Stanley, vol. 35(1), pages 38-49, January.
    11. João A. C. Santos & Andrew Winton, 2008. "Bank Loans, Bonds, and Information Monopolies across the Business Cycle," Journal of Finance, American Finance Association, vol. 63(3), pages 1315-1359, June.
    12. Sung C. Bae & Daniel P. Klein & Raj Padmaraj, 1994. "Event Risk Bond Covenants, Agency Costs of Debt and Equity, and Stockholder Wealth," Financial Management, Financial Management Association, vol. 23(4), Winter.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Drobetz, Wolfgang & Pensa, Pascal & Wöhle, Claudia B., 2004. "Kapitalstrukturtheorie in Theorie und Praxis: Ergebnisse einer Fragebogenuntersuchung," Working papers 2004/09, Faculty of Business and Economics - University of Basel.
    2. Théo Nicolas., 2023. "Bank Market Power and Interest Rate Setting: Why Consolidated Banking Data Matte [Pouvoir de marché des banques et fixation des taux d’intérêt : de l’importance de prendre en compte les données ban," Débats Economiques et financiers 40, Banque de France.
    3. Xiao, He, 2022. "Environmental regulation and firm capital structure dynamics," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 770-787.
    4. Imran Yousaf & Arshad Hassan, 2016. "Effect of Family Control on Corporate Financing Decisions: A Case of Pakistan," PIDE-Working Papers 2016:138, Pakistan Institute of Development Economics.
    5. Sanjiva Prasad & Christopher J. Green & Victor Murinde, 2005. "Company Financial Structure: A Survey and Implications for Developing Economies," Chapters, in: Christopher J. Green & Colin Kirkpatrick & Victor Murinde (ed.), Finance and Development, chapter 12, Edward Elgar Publishing.
    6. Dauda Mohammed, 2013. "A Dynamic Panel Model Of Capital Structure And Agency Cost In Nigerian Listed Companies," Accounting & Taxation, The Institute for Business and Finance Research, vol. 5(2), pages 33-44.
    7. Abrapuspa Ghani Talattov & Nur Azura Sanusi & Suhal Kusairi & Abu Hassan Shaari, 2016. "The Role Of Corporate Zakat On Optimal Capital Structure Policy: Evidence From Malaysian Firms," Journal of Islamic Monetary Economics and Finance, Bank Indonesia, vol. 1(2), pages 259-292, February.
    8. Jocelyn Martel, 1996. "Solutions au stress financier : Un survol de la littérature," CIRANO Working Papers 96s-03, CIRANO.
    9. Shah, Attaullah & Shah, Hamid Ali & Smith, Jason M. & Labianca, Giuseppe (Joe), 2017. "Judicial efficiency and capital structure: An international study," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 255-274.
    10. Víctor M. González & Francisco González, 2011. "Firm size and capital structure: Evidence using dynamic panel data," Post-Print hal-00730234, HAL.
    11. Joliet, Robert & Muller, Aline, 2013. "Capital structure effects of international expansion," Journal of Multinational Financial Management, Elsevier, vol. 23(5), pages 375-393.
    12. Ibrahimo, M.V. & Barros, C.P., 2009. "Relevance or irrelevance of capital structure?," Economic Modelling, Elsevier, vol. 26(2), pages 473-479, March.
    13. Caporale, Guglielmo Maria & Donati, Cristiana & Spagnolo, Nicola, 2023. "Small and medium sized European firms and energy saving measures: The role of financing," Energy Policy, Elsevier, vol. 179(C).
    14. Turki SF Alzomaia, 2014. "Capital Structure Determinants of Publicly Listed Companies in Saudi Arabia," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 8(2), pages 53-67.
    15. Soumaya Hergli & Frederic Teulon, 2014. "Capital structure’s explanatory factors : The Maghreb case," Working Papers 2014-98, Department of Research, Ipag Business School.
    16. Showalter, Dean, 1999. "Strategic debt: evidence in manufacturing," International Journal of Industrial Organization, Elsevier, vol. 17(3), pages 319-333, April.
    17. Ahmed Samour & Abdullah AlGhazali & Mihaela Gadoiu & Mariana Banuta, 2024. "Capital structure and financial performance of China’s energy industry: What can we infer from COVID-19?," PLOS ONE, Public Library of Science, vol. 19(6), pages 1-14, June.
    18. Jocelyn Martel, 1996. "Solutions au stress financier," L'Actualité Economique, Société Canadienne de Science Economique, vol. 72(1), pages 51-78.
    19. Attiya Yasmin Javid & Qaisar Imad, 2012. "A Decomposition Analysis of Capital Structure: Evidence from Pakistan’s Manufacturing Sector," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 17(1), pages 1-31, Jan-June.
    20. Feng-Li Lin, 2020. "Do DJIA Firms Reflect Stationary Debt Ratios?," Economies, MDPI, vol. 8(4), pages 1-19, September.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jijfss:v:11:y:2023:i:4:p:126-:d:1270987. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.