Pledgeability and Asset Prices: Evidence from the Chinese Corporate Bond Markets

Abstract

We provide causal evidence for the value of asset pledgeability. Our empirical strategy is based on a unique feature of the Chinese corporate bond markets, where bonds with identical fundamentals are simultaneously traded on two segmented markets with different rules for repo transactions. We utilize a policy shock on December 8, 2014, which rendered a class of AA+ and AA bonds ineligible for repo on one of the two markets. By comparing how bond prices changed across markets and rating classes around this event, we estimate that when the haircut increases from 0 to 100%, the bond yields increase in the range of 39 to 85 bps. These estimates help us infer the magnitude of the shadow cost of capital in China.

Keywords: Pledgeability, haircut, repo, interbank and exchange markets, enterprise bonds, shadow cost of capital