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

Schweizer, Denis; Walker, Thomas; Zhang, Aoran

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.

Citation

Schweizer, D., Walker, T., & Zhang, A. (2023). False hopes and blind beliefs: How political connections affect China's corporate bond market. Journal of Banking and Finance, 151, Article 106008. https://doi.org/10.1016/j.jbankfin.2020.106008

• Journal Article Type: Article
• Acceptance Date: Nov 6, 2020
• Online Publication Date: Dec 5, 2020
• Publication Date: 2023-06
• Deposit Date: May 25, 2021
• Publicly Available Date: Dec 6, 2023
• Journal: Journal of Banking & Finance
• Print ISSN: 0378-4266
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 151
• Article Number: 106008
• DOI: https://doi.org/10.1016/j.jbankfin.2020.106008
• Keywords: Bank loans, China, Corporate bonds, Emerging markets, Political connections
• Public URL: https://nottingham-repository.worktribe.com/output/5570905
• Publisher URL: https://www.sciencedirect.com/science/article/abs/pii/S0378426620302697