Risk disclosure in bond prospectuses and the costs of debt: Evidence from the Chinese bond market

This paper investigates the impact of risk disclosure level in prospectus on the costs of debt. Our analysis is based on a dataset of corporate bonds issued by all listed companies in the Chinese A-share market from 2020 to 2022. We construct a measure of risk disclosure by designing a dictionary of “risk keywords” based on the semantics of the bond prospectus text to calculate the risk word frequency. We find that the level of risk disclosure in the prospectus has a negative impact on the offering yield spread. In addition, we find that the effect of risk disclosure on the costs of debt is stronger for bonds issued by state-owned enterprises, firms with lower information asymmetry, and firms with higher corporate governance. This paper enriches the literature on the pricing of risk disclosure in the corporate bond market and carries valuable implications for both corporations and regulators.