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

46 Pages Posted: 6 Apr 2019 Last revised: 11 Sep 2019

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

Date Written: September 6, 2019

Abstract

Researchers have recently studied the interactions between corporate and government bond issuances within many countries. Some conclude that government bonds compete with private bond issuances, while others maintain that government bonds provide valuable reference entities that improve the private sector’s ability to issue its own bonds. We study the special case of China’s 2017 issuance of two sovereign bonds denominated in U.S. dollars (USD). We find that USD-denominated Chinese corporate bonds experienced a decline in yield spreads, bid-ask spreads, and price volatility around the time of this sovereign issues’ announcement. The yield spread changes are particularly large for corporate bonds with maturities similar to those of the USD sovereigns. We conclude that these new bonds serve as useful reference instruments, helping investors to price and hedge the risks impounded in Chinese corporate bonds.

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 (September 6, 2019). 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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