The Effect of Government Reference Bonds on Corporate Borrowing Costs: Evidence from a Natural Experiment

50 Pages Posted: 6 Apr 2019 Last revised: 26 May 2020

See all articles by Mark J. Flannery

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

Claire Yurong Hong

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Baolian Wang

University of Florida - Department of Finance, Insurance and Real Estate

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Date Written: May 22, 2020

Abstract

Government bonds might provide reference entities that reduce corporate bond yield. We study China’s 2017 issuance of two U.S. dollars (USD) denominated sovereign bonds when there were (effectively) no outstanding USD sovereigns. We find that USD-denominated Chinese corporate bonds experienced a decline in yield spreads while RMB bonds did not, and the effect was stronger for corporate bonds with maturities similar to those of the USD sovereigns. Further consistent with the reference effect, USD-denominated corporate bonds experienced declines in bid-ask spreads and volatility. Limited evidence indicates that new corporate bond maturities shifted toward the sovereign bonds’ maturity after their issuance.

Keywords: reference bond; China; corporate borrowing

JEL Classification: G12, G15, G18

Suggested Citation

Flannery, Mark Jeffrey and Hong, Claire Yurong and Wang, Baolian, The Effect of Government Reference Bonds on Corporate Borrowing Costs: Evidence from a Natural Experiment (May 22, 2020). Available at SSRN: https://ssrn.com/abstract=3353540 or http://dx.doi.org/10.2139/ssrn.3353540

Mark Jeffrey Flannery

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

Claire Yurong Hong

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

211 West Huaihai Road
Shanghai, China
Shanghai, Shanghai 200030
China

HOME PAGE: http://https://sites.google.com/site/claireyuronghong/

Baolian Wang (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

314 Stuzin Hall
Gainesville, FL 32611
United States

HOME PAGE: http://www.wangbaolian.com

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