A Study On Peer Effects And Credit Recovery Following Credit Bond Defaults Under Local Spillover Perspective

The notion of "preventing and defusing significant economic and financial risks" was repeatedly emphasized in documents such as the 2023 Government Work Report and the 2023 annual systemic work conference of the China Securities Regulatory Commission(CSRC),underscoring its pivotal significance within the realm of economic endeavors.The central focus of the arduous battle to prevent and mitigate major risks lies in controlling financial risks.In recent years,while China’s bond market has experienced rapid expansion and rapid development,there has been a notable increase in default events involving public bonds,listed company bonds,and state-owned enterprise bonds.It is important to resolve the risks in this critical area of bond defaults prudently and systematically.While working to prevent and mitigate financial risks,it’s important to guard against the emergence of regional and systemic financial risks.After major state-owned enterprise bond defaults in 2020 by companies such as Huachen Automotive Group and Yongcheng Coal&Electricity,there was a clear regionalization pattern and contagion phenomenon in bond defaults,sparking discussions in the market about systemic and regional financial risks.Balancing the need to break the vicious cycle of shadow banking and prevent the outbreak of regional and systemic financial risks presents a significant research challenge.Therefore,it is necessary to examine the external consequences of bond defaults in China and the underlying mechanisms from a local perspective.Based on the observations and reflections mentioned above,this paper approaches the exploration of peer company financing and innovation contagion effects following corporate bond defaults from a local spillover perspective.It also examines the local credit recovery scenario.For the peer company financing and innovation contagion effects,this paper utilizes panel data fixed-effects regressions and a difference-in-differences model using data from listed companies.It investigates the causal relationship between corporate bond defaults and the contagion effects on peers.Regarding the local credit recovery scenario,this paper employs bond issuance announcements and text analysis methods to portray typical facts and regional characteristics of credit recovery from perspectives like funding supply,demand,and uncertainty.Utilizing provincial-level panel data fixed-effects regressions and a difference-in-differences model from a local spillover perspective,this paper investigates the overall local credit recovery situation following credit bond defaults,the phenomenon of credit recovery differentiation,and the effectiveness of novel relief policies based on government communication.The core research content and relevant conclusions of this paper can be summarized as follows:This paper utilizes corporate bond default events,employs panel data,fixed-effects regressions,and the difference-in-differences model,exploring the impact of corporate bond defaults on the debt financing and innovation behaviors of local peer companies.The findings indicate that regional peer companies significantly increase their debt leverage following corporate bond default events,particularly in long-term financial liabilities.Concerns about future liquidity risk and potential financing constraints drive this behavior.Consequently,the increase in leverage significantly reduces the rollover risk for these regional peer companies.Learning mechanisms,collateral mechanisms,and competitive mechanisms are identified as explanations for this behavior.The leverage increase is driven by both emergency motives for survival and preventive motives for business operations.The contagion effect of corporate bond default on corporate debt financing exhibits distinct regional and sectoral characteristics,with more pronounced leverage behavior observed in the eastern regions,economic clusters,and manufacturing companies.Furthermore,this chapter identifies the presence of a ratchet effect in the companies’ leverage behavior.The financial resources obtained through increased leverage may affect the innovation behavior of local peers.This paper explores the influence of corporate bond defaults on the innovation investment behavior of local peer companies,and finds that following a corporate bond default event,regional peer companies significantly increase their research and development(R&D)expenditures.This indicates a long-term positive spillover effect of corporate bond defaults on innovation within the peer companies.This positive contagion effect originates from market competition mechanisms viewed from a perspective of genuine business operations.The effect is particularly pronounced among regional peer companies with lower internal financing constraints.As the level of regional patent protection increases,the positive spillover effect of corporate bond defaults on innovation among regional peer companies strengthens.In economically developed regions,corporate bond defaults exhibit evident positive spillover effects on innovation among regional peer companies.Conversely,in less developed regions,a noticeable negative spillover effect is observed.This suggests that corporate bond defaults exacerbate the innovation gap between regions,posing an opportunity for peer companies in economically stronger regions,while representing a risk for their counterparts in weaker economic regions.Further,this paper uses text analysis methods,panel data fixed-effects regressions,and a difference-in-differences model to explore the effects of bond default events on regional macro-level debt financing environments,overall credit recovery situations,differentiation phenomena,North-South regional characteristics,and the effectiveness of relief policies based on government communication mechanisms.The findings indicate that after a default event,the regional debt financing environment faces negative impacts,leading to increased uncertainty in debt financing and heightened difficulty in credit recovery.The credit recovery process exhibits significant differentiation:Bonds with implicit government guarantees,such as local government bonds and state-owned enterprise bonds,experience a substantial increase in financing scale.However,non-guaranteed bonds,primarily issued by private enterprises,face reduced financing scale,indicating the presence of crowding-out effects during the credit recovery process.Breaking the rigid belief in government-backed repayments for state-owned enterprise bonds could improve the market environment and eliminate the crowding-out effects on private enterprise bonds.The crowding-out effects in credit recovery differentiation are attributed to the implicit government guarantee mechanism.Regions with scarcer banking and financial resources experience more severe resource mismatches.The differentiation in credit recovery exhibits distinct North-South regional disparities:In the northern regions,crowding-out effects are more pronounced than the national average,leading to slower credit recovery,whereas,in the southern regions,no crowding-out effects are observed.Relief policies based on government communication mechanisms can stabilize local bond markets,positively impacting debt financing for local private enterprises,but simultaneously exacerbating the crowding-out effects of state-owned enterprise bonds on private enterprise bonds.This paper’s potential innovations are primarily manifested in four aspects:Firstly,it innovatively explores the micro-level responses of peer companies and the macro-level credit recovery situation in regions following corporate bond defaults from a perspective of regional spillover.Existing relevant research predominantly investigates financial risk spillover from the perspectives of stock markets and financial institutions.This paper,however,emphasizes analyzing risk spillover effects among non-financial enterprises.Simultaneously,by considering the regional contagious characteristics of bond defaults,it investigates the externality issue of corporate credit risk from a novel regional spillover viewpoint.Furthermore,within the scope of this research,considerable attention is devoted to exploring regional differentiators such as the scale of regional defaults,geographical location,regional economic integration strategies,level of regional patent protection,and availability of regional banking credit resources.These aspects are often overlooked by existing research on the local spillover effects of bond defaults.Secondly,Causality and Regional Differentiation Analysis.This paper addresses the challenge of distinguishing whether the micro-level peer company responses are a result of corporate bond default contagion or reflect regional macroeconomic dynamics.By categorizing the sample into regional peer companies,non-regional peer companies,and non-peer companies on a "region-industry" level,this paper innovatively disentangles the causal relationship between corporate bond default contagion and peer company behavior.Thirdly,Text Analysis for Macro-Level Effects.This paper employs text analysis to collect bond issuance plans manually and bond issuance abnormality-related announcements.This paper extracts key information to comprehensively analyze post-default regional enterprise financing behavior from various dimensions,such as abnormal bond issuance,debt financing demand,financing purposes,and uncertainties in financing environments.This paper offers a new perspective and empirical evidence for understanding changes in enterprise debt financing demands and the challenges they face in credit risk scenarios.Fourthly,Government Intervention Mechanisms and Crowding-Out Effects.This paper creatively examines the role of implicit government guarantees from a government intervention perspective in the regional credit recovery process.This paper expands the understanding of the formation mechanisms behind the "flight to safety" effect in credit resources.Furthermore,this paper explores structural mismatches in credit resources among enterprises post-default from the viewpoint of crowding-out effects within a credit recovery differentiation context,which differentiates it from existing research on the crowding-out effects of government debt on corporate debt.