Institutional ownership and bond pricing: Evidence from China

This paper examines the impact of institutional ownership on the bond yield spreads of publicly traded Chinese firms. Our research results show the presence of a U-shaped, non-linear relationship between the shareholdings of institutional investors and bond yield spreads. Heterogeneity tests reveal differences in the impact of institutional ownership on yield spreads among different types of institutional investors and for firms in which members of the central government stabilization fund, commonly referred to as “national team” institutions, hold shares. Further tests indicate that corporate governance levels and firm performance serve as channels through which institutional shareholders affect bond yield spreads. • This study finds a significant U-shaped relationship between institutional ownership and secondary market bond yield spreads in the Chinese market, suggesting that an initial increase in institutional ownership leads to a decline in bond yield spreads, but beyond a certain threshold, an increase in institutional ownership causes yield spreads to rise. • The U-shaped relationship between institutional ownership and bond spreads significantly weakens when the main institutional investors are long-term-oriented, or include central government funds aiming to stabilize the stock market, commonly referred to as the “national team”. • Mechanism tests indicate that corporate governance and firm performance serve as channels through which institutional shareholders affect bond yield spreads.