The Financial Value of the Within-Government Political Network: Evidence From Chinese Municipal Corporate Bonds

Abstract

This paper examines the effect of the political network of Chinese municipal leaders on the pricing of municipal corporate bonds. Using municipal leaders' working experience to measure the political network, we find that this network improves the credit ratings of the issuer, local government financing vehicles, reducing their issuance yield spreads. The relationship between political networks and issuance yield spreads is strengthened in areas where financial markets and legal systems are less developed.

Keywords: Political Network, Guanxi, Local Government Financing Vehicles, Municipal Corporate Bonds, Credit Risk

JEL Classification: G12, G14, G28, H74