Why Do Firms Issue Bonds in the Offshore Market? Evidence from China

Abstract

International debt financing is important for the development of emerging economies, as it gives firms from emerging markets (EMs) access to greater liquidity, a wider investor base and more effective laws and regulations. However, the financial crisis in the late 1990s, coupled with recent rapid growth in corporate leverage in EMs forced policymakers to re-evaluate the risk of offshore financing, and its role in EMs’ development. In this paper, we investigate the bonding/signalling effect of offshore financing in domestic market financing reflected by the improvement of information disclosure and creditability. Using a comprehensive database covering bond issuances by Chinese firms in domestic and offshore markets from 2010-2015, we find that: 1) The offshore bond issuance improves the funding conditions of the issuer in the subsequent domestic bond issuance, in terms of longer maturity of corporate issuance and lower funding cost. 2) The change of financing terms is more significant for domestic issuance by firms that have been issued bonds offshore under public issuance or with an international investment-grade rating. 3) Offshore debt financing improves long-term firm performance, especially for financially constrained companies. 4) Offshore bonds issued with a registration domain in Hong Kong, under Hong Kong law or listed on the Hong Kong exchange market have stronger signalling effects in the subsequent domestic issuance than other offshore locations. Our study underscores the role of offshore financing in promoting the institutional environment and firm growth of the domestic market, and offers policy suggestions for emerging economies in developing a broad offshore corporate bond market.