Perception versus fundamentals: How narrative tone shapes bond pricing

• More positive annual-report tone predicts lower yield spreads in China’s primary and secondary bond markets (2008–2022). • The effects are larger for non-SOEs, low-profitability, and high-leverage issuers. • Tone is unrelated to ratings, Altman Z, or ROA, consistent with a perception/behavioural channel. • The tone–spread link strengthens when investor sentiment is high or policy uncertainty is elevated. This study investigates whether the tone of annual reports influences the cost of corporate bond financing in China. Using a large sample of bond issues and secondary market trades from 2008 to 2022, we find that more positive annual report tone is associated with significantly lower offering yield spreads and yield-to-maturity spreads. The effect is concentrated among non-state-owned enterprises and firms with lower profitability, consistent with investors relying more on soft information when hard financial signals are weaker. Importantly, tone is unrelated to credit ratings, Altman Z-scores, or profitability, indicating that the pricing effect arises from investor psychology rather than improved fundamentals. Our findings highlight the behavioural role of narrative disclosures in shaping bond market outcomes.