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

55 Pages Posted: 15 Feb 2017 Last revised: 8 Jun 2021

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 8, 2021

Abstract

We study the effects of implicit government guarantee (IGG) on Chinese state-owned enterprises (SOEs). We find that SOEs reduce their investments by 2.4% of book assets, on average, relative to matched non-SOEs after the first SOE default in China’s onshore bond markets in 2015. The investment reduction concentrates among SOEs that are financially constrained, yet SOEs financed by large state banks are hardly affected. Bondholders require more stringent default protection in newly issued SOE bonds. We also find that the investment reduction is more pronounced for SOEs with severe agency problems and SOEs experience more positive market reactions to acquisition announcements after 2015. Our results suggest that the reduction in IGG has confounding effects on Chinese firms. Although the weakening of IGG may help mitigate overinvestment, it exacerbates financial constraints of those with limited access to alternative sources of financing.

Keywords: implicit government guarantee, state-owned enterprises (SOEs), investment, corporate bonds, default, financial constraint

JEL Classification: G12, G15, G30, G38

Suggested Citation

Jin, Shuang and Wang, Wei and Zhang, Zilong, The Real Effects of Implicit Government Guarantee: Evidence from Chinese SOE Defaults (June 8, 2021). 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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