Corporate Bonds with Implicit Government Guarantees

56 Pages Posted: 15 Mar 2021 Last revised: 20 Jun 2021

See all articles by Yifei Li

Yifei Li

University of Nevada Reno

Yuan Tian

University of Cincinnati - Department of Finance - Real Estate

Tong Yu

University of Cincinnati - Department of Finance - Real Estate

Ran Zhang

University of Science and Technology Beijing

Date Written: March 15, 2020

Abstract

We model an implicit government guarantee as a partial protection for corporate bonds issued by state-owned enterprises (SOEs) and present pervasive evidence of its existence in the Chinese corporate bond market. The protection effect is stronger among poorly rated SOE bonds than for highly rated SOE bonds -- for newly issued corporate bonds, the average guarantee premium is 72 basis points (bps) for AAA bonds while it is 166 bps for AA- (lowest issuance rating) bonds. We find the guarantee premiums are higher for bonds issued by central government sponsored SOEs and by issuers from strategically important sectors, raising concerns of the potential too-interconnected-to-fail problem.

Keywords: Implicit government guarantees, Bond yield, Default, Bailout, Credit rating

JEL Classification: G12, G13

Suggested Citation

Li, Yifei and Tian, Yuan and Yu, Tong and Zhang, Ran, Corporate Bonds with Implicit Government Guarantees (March 15, 2020). Available at SSRN: https://ssrn.com/abstract=3554518 or http://dx.doi.org/10.2139/ssrn.3554518

Yifei Li (Contact Author)

University of Nevada Reno

College of Business
1664 N. Virginia St
Reno, NV 89557
United States

Yuan Tian

University of Cincinnati - Department of Finance - Real Estate ( email )

P.O. Box 210195
Cincinnati, OH 45221-0195
United States

Tong Yu

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
4019548606 (Phone)
4019548606 (Fax)

Ran Zhang

University of Science and Technology Beijing ( email )

30 Xueyuan Road, Haidian District
Beijing, 100083
China

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