False Hopes and Blind Beliefs: How Political Connections Affect China's Corporate Bond Market

73 Pages Posted: 21 Jul 2019 Last revised: 18 Nov 2020

See all articles by Denis Schweizer

Denis Schweizer

Concordia University

Thomas John Walker

Concordia University, Quebec - Department of Finance

Aoran Zhang

University of Nottingham

Date Written: November 15, 2020

Abstract

This paper explores whether and how political connections affect the market for corporate bonds issued by privately owned enterprises (POEs) in China. We test two competing theories – the zero-default myth and the borrower channel theory – that predict how political connections affect the likelihood of bond issuance, refinancing costs, the market reaction to a bond issue announcement, and firms’ post-issue performance. Using a sample of Chinese POEs from 2007 to 2016, we show that – in line with the zero-default myth theory – politically connected POEs are more likely to issue corporate bonds as a debt financing instrument than their non-connected counterparts. They also achieve lower coupon rates (i.e., lower refinancing costs), despite exhibiting lower overall performance after bond issuance. We find that investors react positively to corporate bond-issuing announcements if the issuing firm is politically connected. At the same time, our research indicates that politically connected bond-issuing POEs in China have weaker corporate governance and a surprisingly higher default probability than non-connected issuers.

Keywords: Bank Loans, China, Corporate Bonds, Emerging Markets, Political Connections

JEL Classification: G15, G18, G34

Suggested Citation

Schweizer, Denis and Walker, Thomas John and Zhang, Aoran, False Hopes and Blind Beliefs: How Political Connections Affect China's Corporate Bond Market (November 15, 2020). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3419836 or http://dx.doi.org/10.2139/ssrn.3419836

Denis Schweizer (Contact Author)

Concordia University ( email )

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HOME PAGE: http://www.concordia.ca/jmsb/faculty/denis-schweizer.html

Thomas John Walker

Concordia University, Quebec - Department of Finance ( email )

Montreal, Quebec H3G 1M8
Canada

Aoran Zhang

University of Nottingham ( email )

Jubilee Campus
Wollaton Road
Nottingham, NG8 1BB
United Kingdom

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