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Implicit Government Guarantee, Bond Default and the Interest Spread of State-Owned Enterprises Credit Debt

【Authors】
WANG Xuguo, SHEN Hongbo & ZHONG Linjia
【WorkUnit】
WANG Xuguo (Nanjing Audit University, 211815)SHEN Hongbo, ZHONG Linjia (Fudan University, 200433)
【Abstract】

De-leveraging is a major measure to prevent financial risks. The central government hopes to break the rigid redemption, reduce the government's implicit guarantees, and encourage market-based debt risk mitigation. This paper first elaborates the motivation of breaking the rigid payment of state-owned enterprises, and then uses the data of local state-owned enterprises' credit bonds issued in 2014-2017 to further test the influence of bond default on the bond market. The empirical study results show that: (1) Bond default shows a tendency of contagion in the province, and default can reduce the credit rating of other state-owned bonds in the province. (2) After the state-owned bond default, the effectiveness of the credit rating of the state-owned enterprise in lowering the bond's interest spread is reduced. (3) The implicit guarantee can significantly reduce the bond's interest spread. With the increase in the amount of bond default in the province, the role of implicit guarantee is reduced. The results of this paper show that bond default breaks rigid redemption, which is conducive to strengthening the constraints of market discipline, reducing the role of government implicit guarantees, and promoting the long-term development of the bond market.


JEL:G12, H81

【KeyWords】
Bond Default, Implicit Guarantee, Information Content, Rigid Redemption