Do social ties matter for corporate bond yield spreads? Evidence from China

• Author: Xuemei Qiu,Zuoping Xiao,Zhong‐qin Su
• DOI: http://doi.org/10.1111/corg.12294
• Published date: 01 November 2019
• Date: 01 November 2019

ORIGINAL ARTICLE

Do social ties matter for corporate bond yield spreads?

Evidence from China

Xuemei Qiu

1

|Zhong‐qin Su

2

|Zuoping Xiao

2

1

School of Economics and Management,

Southwest Jiaotong University, Chengdu,

Sichuan, China

2

School of Accounting, Hangzhou Dianzi

University, Hangzhou, Zhejiang, China

Correspondence

Zuoping Xiao, School of Accounting, Hangzhou

Dianzi University, 1158 No.2 Street,

Hangzhou, Zhejiang 310018, China.

Email: xzp4061@sina.com

Funding information

National Natural Science Foundation of China,

Grant/Award Number: No.71772154

No.71472157 No.71602178; Natural Science

Foundation of Zhejiang Province, Grant/Award

Number: No. LQ15G020005; Project of Youth

for Humanity and Social Sciences from the

Ministry of Education of China, Grant/Award

Number: No. 15YJC790090;Zhejiang Provin-

cialPhilosophy and Social Science Foundation

of China, Grant/Award Number: No.

17NDJC227YB

Abstract

Research Question/Issue:This paper studies the effect of top management team

(TMT) network centrality on corporate bond yield spreads. In additional analyses,

we examine the hierarchical structures of TMT and study which parts contribute to

the decrease in bond yield spreads. We also examine the mediating roles (including

informed trading probability, media coverage, political ties, financial ties, and bond

ratings) and the moderating roles (including marketization and analysts following) in

the correlationbetweenTMTnetwork centrality and corporate bond yield spreads.

Research Findings/Insights:This paperfinds thatfirms withhigh TMT network cen-

trality are significantly negatively correlated with lower bond yield spreads. The find-

ings are robust after controlling for a series of sensitivity checks and endogenous

concerns. The results of the hierarchical structures show that the decrease of bond

spreads is accounted for CFOs' networks and board members' networks, whereas

the role of CEOs' networks is not apparent. More importantly, after controlling CEOs'

networks, CFOs' networks, and board members' networks, the centrality of all TMT

members' networks remains statistically significant, indicating that firms can benefit

from the interlocking of all TMT members (not just the senior members). From the

mediating effect results, we find that high TMT network centrality increases the value

of a firm's probability of informed trading and its bond ratings while also increasing a

firm's access to media coverage, political ties, and financial ties, which in turn can help

lower bondholder' risk premiums. The moderating effect results show that the higher

the marketization index and the more analysts following a firm, the higher the benefit

of TMT network centrality to bond spreads.

Theoretical/Academic Implications:The results provide strong evidence that

bondholders require lower bond yield spreads for firms with higher TMT network cen-

trality, which suggests that TMT network centrality is critically essential for firms to

obtain resources and to build a good corporate image and reputation; TMT network

centrality can also lead to better information flow.

Practitioner/Policy Implications:This paper can inform various stakeholders about

the impactofhigh TMT network centrality on bond yield spreads. It would be helpful

to ensure the reasonable pricing of corporate bonds and to promote healthy and

sound development of the bond market.

Received: 10 October 2018Revised: 30 May 2019Accepted: 31 May 2019

DOI: 10.1111/corg.12294

Corp Govern Int Rev. 2019;27:427–457. © 2019 John Wiley & Sons Ltdwileyonlinelibrary.com/journal/corg427

KEYWORDS

corporate governance, bond yield spreads, interlocking networks, weighted centrality, top

management team (TMT)

1|INTRODUCTION

Since the seminal work of Coleman (1988), which indicates the rela-

tionship between social interactions and economic behaviors, the

notion of “social capital”has captured tremendous attention in aca-

demic research. From the perspective of social capital, economic activ-

ities are usually embedded in social networks (Engelberg, Gao, &

Parsons, 2012; Fracassi, 2017; Freeman, 1978; Kim, 2005; Larcker,

So, & Wang, 2013; Palmer, 1983).

Social networks are considered to be a strategic resource that can

help create competitive benefits for firms. However, recent studies

derive inconsistent conclusions about the benefits of social ties. Some

studies strongly suggest that firms can benefit from social ties by

obtaining benefits such as high credit ratings (Benson, Iyer, Kemper, &

Zhao, 2018; Khatami, Marchica, & Mura, 2016; Skousen, Song, & Sun,

2018), preferential source of financing (Booth & Deli, 1999; Braun,

Briones, & Islas, 2018; Engelberg et al., 2012; Fogel, Jandik, &

McCumber, 2018; Yen, Chen, Shen, & Lin, 2014), increased innovation

(Helmers, Patnam, & Rau, 2017), less earnings management (Shu, Yeh,

Chiu, & Yang, 2015), improved corporate governance (Chen, Shen, &

Lin, 2014; Pascual‐Fuster & Crespí‐Cladera, 2018), and better firm per-

formance (Cai & Sevilir, 2012; Kim, 2005; Larcker et al., 2013; Rossi,

Blake, Timmermann, Tonks, & Wermers, 2018). However, other studies

argued that social ties may lead to adverse outcomes. For instance,

some firms might increase their engaging management (Chiu, Teoh, &

Tian, 2013) and pay their executives significantly more (Andres, Fernau,

& Theissen, 2013); they might also become involved in financial fraud

contagion (Fich & Shivdasani, 2007), reducing firm value (Fracassi &

Tate, 2012) and weakening corporate governance (Falato,

Kadyrzhanova, & Lel, 2014). Given the inconsistent conclusions about

the influence of social ties on firms, shedding more light on this issue

is warranted. In line with previous literature that pays close attention

to social ties, the objective of this paper is to investigate the net effects

of social networks by focusing on the cost of debt capital.

Prior literature on social ties basically focuses on the CEOs, CFOs,

or members of boards partially (Benson et al., 2018; Cai & Sevilir,

2012; Chuluun, Prevost, & John, 2014; Fogel et al., 2018; Helmers

et al., 2017; Khatami et al., 2016; Skousen et al., 2018). As Bian

(2002) noted, “social capital is not only merely restricted to CEOs,

CFOs or members of boards partially, but also for other executives

in production and operating activities who may play important roles

in exploitation and utilization of their social capital.”Bian (2002) also

called for more research into how to fully capture the social capital

of a firm as an aggregate whole. To address this call, we apply resource

dependence theory and focus on mitigating the potential selection

bias by aggregating top management team (all TMT including CEOs,

CFOs, board members, supervisors, and other executives) network

centrality (TMT network centrality, hereafter) to examine how social

networks reduce the cost of bond capital.

Moreover, previous studies on social ties mainly concentrate on

the impact of direct ties on various firm‐level economic outcomes

(Claessens, Feijen, & Laeven, 2008; Engelberg et al., 2012; Faccio,

Masulis, & Mcconnell, 2006; Güner, Malmendier, & Tate, 2008; Kha-

tami et al., 2016). Recently, a growing literature has focused on exam-

ining both the direct and indirect social ties of the overall network

(interlocking centrality; Benson et al., 2018; Chuluun et al., 2014; El‐

Khatib, Fogel, & Jandik, 2015; Skousen et al., 2018). Studies of

interlocking centrality emphasize the importance of the network struc-

ture and try to assess the social ties more comprehensively.

In this paper, we extend these interlocking centrality studies and

focus on the impact of the network centrality of the entire top man-

agement team on the bond cost by using the dataset of Chinese A‐

share companies from 2007 through 2016. China can serve as a test

case to examine the impact on firms' social networks. Over the past

40 years, China's economy has grown exceptionally rapidly. However,

neither its financial nor its legal environment is well developed. Allen,

Qian, and Qian (2005) conjectured that to support economic growth,

China must have alternative governing mechanisms and informal insti-

tutional arrangements, such as those based on reputation and

“guanxi.”China is a typical relationship‐based society, in which a per-

son's social ties may be more important than personal abilities (Yeung

& Tung, 1996). Financial transactions based on social ties have a deep

foundation in Chinese culture. Chinese traditional culture is funda-

mentally based on Confucianism, one basic tenet of which stresses

the importance of social relationships. Talavera, Xiong, and Xiong

(2012) argue that despite the remarkable progress made in

transforming China's economy into market orientation, the

relationship‐oriented nature of the financial transactions in China is

still obvious. Moreover, China's agency problems and information

asymmetry are serious, potentially hindering the development of debt

markets. To alleviate the financing dilemma, firms can rely on social

networks to disseminate information, build trust relationships, and

obtain access to more financing (El‐Khatib et al., 2015; Lyon, 2000).

Therefore, it is of great theoretical and practical significance to analyze

the correlation between social networks and bond financing in China.

We examine both direct and indirect interfirm connectedness and

find thatfirmswithhigh TMT network centrality are significantly

related to lower bond cost, even after adding a variety of firm and

bond control variables. These results indicate that, due to the

improved reputationand image,high TMT network centrality can help

firms to obtain more resources. Furthermore, our results indicate that

social interaction and information spillovers have a positive and mean-

ingful value in a relationship‐based market. This study conducts a

series of additional checks to alleviate endogenous issues and the

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