The Real Effects of Implicit Government Guarantee: Evidence from Chinese SOE Defaults

57 Pages Posted: 15 Feb 2017 Last revised: 8 Jun 2020

See all articles by Shuang Jin

Shuang Jin

HKUST

Wei Wang

Queen's University - Smith School of Business

Zilong Zhang

City University of Hong Kong

Date Written: June 5, 2020

Abstract

We study the effects of implicit government guarantee (IGG) on corporate investment by exploiting a series of defaults in China’s onshore bond markets by state-owned enterprises (SOEs) starting in 2015. We find that SOEs reduce their investments by 2.4% of book assets, on average, relative to propensity-score matched non-SOEs in the periods after the first SOE default. The investment reduction concentrates among SOEs with more severe agency problems. SOEs experience more positive market reactions to acquisition announcements after the default events. Our findings suggest that the reduction of IGG alleviates the soft budget constraint problem and disciplines SOE managers.

Keywords: implicit government guarantee, investment, acquisition, state-owned enterprise, default

JEL Classification: G15, G33, G38

Suggested Citation

Jin, Shuang and Wang, Wei and Zhang, Zilong, The Real Effects of Implicit Government Guarantee: Evidence from Chinese SOE Defaults (June 5, 2020). Available at SSRN: https://ssrn.com/abstract=2916456 or http://dx.doi.org/10.2139/ssrn.2916456

Shuang Jin (Contact Author)

HKUST ( email )

Clear Water Bay, Kowloon
Hong Kong

Wei Wang

Queen's University - Smith School of Business ( email )

Queen's University-Smith School of Business
143 Union Street
Kingston, Ontario K7L 3N6
Canada

Zilong Zhang

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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