Financial Cycle and the Design of Restrictive Covenant Clauses in Bond Contracts

Based on corporate bond data issued by A-share listed companies in China, this article studies the impact of financial cycles on the design of restrictive covenant clauses in bond contracts. The study found that when the financial cycle is in a boom period, the number of restrictive covenant clauses in bond contracts is significantly reduced; when the financial cycle is in a recession period, the number of restrictive covenant clauses in bond contracts is significantly increased. Channel analysis shows that when the financial cycle is in a boom period, the financing constraints faced by companies are reduced, effectively reducing the use of restrictive clauses in corporate bonds; when the financial cycle is in a recession period, the financing constraints faced by companies are significantly increased, thus increasing the use of restrictive clauses in corporate bonds. Further heterogeneity analysis shows that the impact of financial cycles on the number of restrictive covenant clauses in bond contracts is more pronounced in non-state-owned, low-transparency and low-marketization companies.