Comment Letters, Connected Investors, and Corporate Bond Issuance

Using a proprietary dataset that documents corporate bond issuances in China, we find that bond regulators’ comment letters (CLs) on issuers’ public disclosures generally target opaque firms and reduce bond issuance success. We also find, however, that connected investors—financial institutions with prior business relationships with the issuers—purchase a relatively larger share of bond issuances from CL recipients than from non-CL recipients, and this greater participation contributes to overpricing. Further analysis shows that when connected investors support CL recipients, they are motivated by their capacity to transfer private information and benefits derived from their connections.