Social networks and bond covenants: evidence from China

This paper explores the relationship between managerial social networks and bond covenants by using a sample of Chinese corporate bonds during 2016-2019. We find that firms with higher social network centrality issue corporate bonds with more covenant restrictions. This positive association is amplified in provinces with less developed financial systems and weaker legal protection of creditors. Our results are robust to several robustness tests and endogeneity considerations. Moreover, we examine the mechanisms relating social network centrality to bond covenants. The results show that social networks can reduce the information opacity and strengthen contract enforceability. We also find that the positive association between social network centrality and bond covenants is more pronounced in firms with lower prior but higher current social networks. Finally, this paper shows that the benefits of debt covenants in reducing credit spreads only exist in firms with higher social network centrality.