False hopes and blind beliefs: How political connections affect China's corporate bond market

Denis Schweizer, Thomas Walker and Aoran Zhang

Journal of Banking & Finance, 2023, vol. 151, issue C

Abstract: This paper explores whether and how political connections affect the market for corporate bonds issued by privately owned enterprises (POEs) in China. We test two competing theories – the zero-default myth and the borrower channel theory – that offer alternative explanations for the effect of political connections on the likelihood of bond issuance, the costs of refinancing, the market reaction to a bond issue announcement, and the performance of the firm after the bond has been issued. Using a sample of Chinese POEs from 2007 to 2016, we show that – in line with the zero-default myth theory – politically connected POEs are more likely to issue corporate bonds as a debt financing instrument than their non-connected counterparts. They also achieve lower coupon rates (i.e., lower refinancing costs), despite exhibiting lower overall performance after bond issuance. We find that investors react positively to corporate bond-issuing announcements if the issuing firm is politically connected. At the same time, our research indicates that politically connected bond-issuing POEs in China have weaker corporate governance and a surprisingly higher default probability than non-connected issuers.

Keywords: Bank loans; China; Corporate bonds; Emerging markets; Political connections (search for similar items in EconPapers)
JEL-codes: G15 G18 G34 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:151:y:2023:i:c:s0378426620302697

DOI: 10.1016/j.jbankfin.2020.106008

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