The Real Effects of Implicit Government Guarantee: Evidence from Chinese SOE Defaults
51 Pages Posted: 15 Feb 2017 Last revised: 20 Nov 2019
Date Written: November 19, 2019
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. Our difference-in-difference tests show that SOEs reduce their investments by 3% 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 managers.
Keywords: implicit government guarantee, investment, acquisition, state-owned enterprise, default
JEL Classification: G12, G15, G30, G38
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