Exploring the Information Acquisition Mechanism in a Bond Market: Evidence From Peer Effects in Bond Covenant Design in China

ABSTRACT Using a sample of corporate bonds issued by Chinese A‐share listed firms from 2007 to 2023, we study whether industry peer effects in bond covenant design exist and, if they do, the mechanisms through which they work as well as their economic consequences. We document that a firm's bond covenants index is positively affected by the average bond covenant index of its peers in the same industry. The findings remain intact after accounting for regional, underwriter and firm characteristics. Additional analysis suggests that the peer effects work through peer firms acquiring information about each other. Moreover, the peer effects are more salient in state‐owned firms or when the underwriters' reputation is lower. In contrast, when the firms' customer concentration is high, firms operate in a better information environment, or firms face less industry competition, industry peer effects in bond covenant design significantly diminish. Finally, we find that industry peer effects in corporate bond covenant design reduce the credit spread of a bond and improve the issuer's firm value. Overall, we not only broaden the scope of the research on industry peer effects but also advance the literature on the determinants of bond covenants.