Abstract: In recent years, medium term notes and corporate bonds are developing reversely; however, what is the internal mechanism of the changes of preference between corporate bonds and medium term notes in the listed companies? The study of this paper finds that the high threshold for bonds issuing set by the China Securities Regulatory Commission makes the companies which can issue bonds have the characteristics of longer listing time and higher growth rate of EPS. Under this kind of strict regulation, the issuing companies are not showing better financial characteristics. On the contrary, companies with large scale and abundant free cash flow would prefer to issue medium term notes. Free cash flow per share is lower before issuing debt while the quick growth of EPS is to reach the standard with earnings control. The strict regulation on corporate bonds makes the bond market in the stock exchanges shrink, which reduces the liquidity of corporate bonds. In order to make up the loss in liquidity, the coupon rate of corporate bonds is higher than that of medium term notes, which makes the listed companies even prefer to issue medium term notes.

Key words: financial regulation; corporate bonds; medium term notes