<p>Limited evidence exists on the real effects of bond market liberalization, particularly on corporate investment behavior. This study examines the impact of bond market liberalization on corporate investment, exploiting the 2017 launch of China’s Bond Connect—which allows foreign investors to directly participate in the interbank bond market—as a quasi-natural experiment that increases firms’ exposure to foreign debtholders. Using a difference-in-differences design, we find that bond market liberalization constrains corporate investment. Channel analyses reveal that this effect operates through tighter bond covenants, higher reputation costs, and increased litigation risk imposed by foreign bondholders. Consistent with a governance-based interpretation, the investment-reducing effect is more pronounced among firms with weaker governance structures, including fewer independent directors and less effective internal control systems. Importantly, the decline in investment is concentrated in overinvestment rather than value-enhancing projects, indicating that foreign bondholders discipline managerial empire-building without inducing excessive conservatism. Correspondingly, firms experience lower default risk, reduced credit spreads, and higher firm value following liberalization. Overall, our findings highlight the distinct, non–ownership-based governance role of foreign debtholders and suggest that bond market liberalization can foster efficiency and financial stability in emerging markets characterized by relatively weak domestic institutions.</p>