| Local government intervention exists in China’s bond market for a long time.How to play the active role of local governments to prevent and resolve credit risks in the bond market,improve the degree of bond marketization,and overcome investors’ soft budget constraint psychology is an important issue.Before 2014,local governments generally used ex ante intervention to prevent the occurrence of defaults.During this period,there were many credit crisis incidents,but finally the principal and interest were fully paid under the support of local governments.The ex-ante bailout by local governments has increased implicit guarantee expectations,weakened investors’ risk awareness,and accumulated risks in the bond market.After 2014,with the default of the “11 Chaori Bond”,more and more bonds defaulted,and the intervention of local governments changed from the original ex ante to ex post.Local governments still play an important role in the subsequent disposal of default bonds.Local governments can exert important influence on banks,underwriters,and enterprises.They can coordinate the interests of all parties in the event of default,and can also help enterprises complete payment through bailout funds,direct investment,or authorizing state-owned enterprises to compensate.In the game of default disposal,when the cost of the local government’s bailout is greater than the benefit,the local government will also give up the bailout of the defaulting enterprises,resulting in different disposal results.Then,whether local government intervention after bond default will lead to the reestablishment of soft budget constraints,and what the differences between ex post intervention and ex ante intervention,will these two types of intervention cause different economic consequence,these are the main issues that this paper focuses on.In the existing literature,bond default is generally regarded as a signal to break the implicit guarantee,which will help improve the pricing function of credit ratings,increase investors’ demand for high-quality accounting information,and improve the marketization of bond market(Wang et al.,2019;Tao and Liu,2021;Dong et al.,2021;Mo et al.,2021).However,whether the default event can completely break investors’ soft budget constraint psychology also depends on the attitude and actions of local governments in dealing with bond defaults.After the reform of the tax-sharing system,the autonomous management authority of local governments has increased,the pursuit of local areas’ economic growth forms intergovernmental competition(Montinola et al.,1995;Qian and Roland,1998;Jin et al.,2005).In order to stabilize regional credit risks and attract more funds to local projects,local governments are likely to help enterprises repay their bond.In fact,many defaulted bonds such as “11 Mengnailun Bond”,“15Sichuan Coal CP001","15 Hongda CP001" were repaid with the assistance of the government.As defaulted bonds are paid off,investors’ expectation of government bailouts may return,leading to the re-establishment of soft budget constraints.This paper starts from the perspective of local government intervention,exams the impact of rigid payment events and default disposal events on regional credit,and explores the problem of soft budget constraints under different types of local government intervention in different stages of China’s bond market.First,this paper explores the formation of soft budget constraints in the rigid payment stage.Through the research,it is found that the occurrence of rigid payment events will significantly improve the regional credit level,which is specifically reflected as the increasing of the amount of bond issuance and the reduction of bond credit spreads.Further research found that the improvement of the regional credit level is mainly reflected in the bond issuance of state-owned enterprises,the issuance of low-rated bonds and the issuance of unguaranteed bonds,and after the rigid payment event,the quality of financial reports of new bond issuers declines significantly.This shows that the ex-ante bailout of local governments has increased investors’ expectations for implicit government guarantees,and the government’s incentive of bond market’s risk control has strengthened investors’ soft budget constraint psychology,reduced investors’ risk awareness,and led to the accumulation of risk in the bond market.Second,this paper examines the impact of bond defaults on regional credit risk.Through the research,it is found that bond default will significantly damage the regional credit.Specifically,it will cause the decreasing of the amount of bond issuance and the increasing of bond credit spreads.Further research found that the decreasing of regional credit is mainly reflected in the issuance of state-owned enterprise bonds and low-rated bonds.In addition,this paper also analyzes the impact of default events at the bond level.The study finds that the default event will cause an increase in the spread of newly issued bonds in this province.When the defaulting enterprise is a state-owned enterprise,an enterprise with a large scale of assets or operating income,the impact of default on issuance spread is greater.The impact of bond defaults on bond issuance spread is mainly reflected in the sample of local state-owned enterprises among stateowned enterprises.Through the analysis of default events,this paper reveals the role of local government’s implicit guarantee in the bond market,and the cost that local governments have to bear after the implicit guarantee is broken.Bond default has changed the way of local government intervention from ex-ante to ex-post,so this paper continues to explore the impact of bond disposal on soft budget constraints.Firstly,this paper examines the impact of bond repayment on regional credit.At the provincial level,the study found that the repayment of defaulted bonds significantly increases the amount of bond issuance and decrease the average spread of bond issuance.This effect exists regardless of whether it is state-owned enterprise bonds or private enterprise bonds,whether it is high-rated bonds or low-rated bonds.At the bond level,the repayment of defaulted bonds has significantly reduced the spread of newly issued bonds in this province.Compared with state-owned enterprises,the repayment of private enterprises has a more significant effect on decreasing spread.Furthermore,by comparing the post repayment credit level of province with the predefault credit level,it is found that the regional credit after repayment is significantly higher than the level before default,and this effect exists regardless of whether it is state-owned enterprise bonds or private enterprise bonds,whether it is high-rated bonds or low-rated bonds.These results indicate that the repayment of defaulted bonds cause the soft budget constraint to be re-established.With the increase in the number of defaulted bonds and the increase in local government rescue costs,the willingness of local governments to rescue will also decrease.This paper continues to explore the impact of the bankruptcy event of defaulting enterprises on regional credit.The study found that the bankruptcy of defaulting enterprises will reduce the credit of the region,which is manifested in the reduction of the total amount of bond issuance and the increase of bond issuance spread,and this effect is mainly reflected in the issuance of state-owned enterprise bonds and the issuance of low-rated bonds.After bankruptcy event,the quality of financial reporting of issuers of newly issued bonds has improved significantly.Furthermore,by comparing the post-default regional credit level with post-bankruptcy credit level,it is found that the regional credit level after bankruptcy is significantly lower than the level after default,which indicates that bankruptcy after default will further break investors’ soft budget constraints psychology.Finally,this paper explores factors considered by local governments in the resolution process.It is found that the greater the impact of bond default events on regional credit,the higher the probability of bond repayment,and the lower the level of economic development in the region,the higher the probability of bond repayment.However,the nature of state-owned enterprises and other corporate-level financial indicators have no significant impact on bond repayment,which shows that local governments are more concerned with macro factors such as the impact of default events and regional economic development.The research in this paper has important theoretical and practical implications.First of all,in the previous studies on the bond market,most of the literature focused on the economic consequences of bond defaults,and few literatures focused on the disposal process after default.This paper focuses on the impact of bond disposal on soft budget constraints and the factors affecting bond repayment,which enriches the literature on the bond market.Secondly,this paper verifies the existence of soft budget constraints in China’s bond market,and explains the formation mechanism of soft budget constraints.There are two explanations for the existence of soft budget constraints in the previous literature.One is the policy burden of state-owned enterprises,and the other is incredible commitments when considering sunk costs.The research in this paper enriches the relevant literature on the formation of soft budget constraints.At the practical level,this paper finds that the ex-ante intervention of local governments will lead to a flood of low-quality bond issuance,laying potential dangers for bond defaults and systemic risks.Compared with ex-ante intervention,the intervention after default may be a better choice.Intervention after the default event can send different signals to investors.If the local government helps the defaulting enterprise to complete the payment,it can quickly restore the regional credit,but at the same time it also strengthens the investor’s soft budget constraint psychology.If the local government does not implement the bailout,the defaulting enterprise will go bankrupt and enter reorganization procedures,which ultimately let investors bear losses,this would raise greater regional credit risk.Therefore,local governments can selectively rescue defaulting enterprises,which can not only prevent the outbreak of large-scale regional credit risks,but also overcome investors’ soft budget constraint psychology through the uncertainty of bailouts. |
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