Study On The Impact Of Debt Default Of Local State-Owed Enterprises On Credit Spreads

Since the default of Chaori Bond in 2014,there have been frequent Default events in China’s bond market,especially since 2015,when local state-owned enterprises(SOEs)bonds have also defaulted,which has attracted wide attention from the industry and academia.One view is that local SOEs have long been explicitly or implicit government guarantee(IGG),and the recent partial and sporadic bond default will not systematically change investors’ expectations,so they will not have an impact on the future debt financing market of SOEs.However,another view is that in recent years,driven by the central government,local governments are gradually strengthening the market-oriented reform of SOEs,further clarifying the relationship between the government and enterprises,and the IGG of the government for SOEs is weakening.Therefore,the debt default of local SOEs may be a kind of evidence for the government to reduce the IGG.Therefore,this research topic is of great significance not only to market investors,but also to the government and regulatory authorities.According to the current research,there is no clear answer to this issue in the academia.By collecting the bond default events of local State-owned enterprises,this paper locks the samples of other SOEs in the region,systematically detects the changes in the credit Spreads of the sample group of SOEs before and after the default events with an empirical method,and explains the changes based on the IGG theory of local governments.Specifically,this paper first collects the bond default events of local SOEs from 2014 to2021,thereby determining the occurrence time and provinces and regions.Then,the credit Spreads of other SOEs in the region within three quarters are calculated by provinces and regions,and other non-SOEs in the region are used as the control group.This paper uses the multi-period DID method to systematically test the impact of local State-owned enterprise debt default on the credit spreads of other enterprises in the same region,and explains the relevant results based on the IGG theory of local government.The empirical findings are as follows: first,after the default of local SOEs,the credit Spreads of other SOEs’ bonds in the region increase significantly,indicating that the default event has a significant negative impact on the SOEs’ bond financing market in the region.This paper argues that after the default of SOEs,market investors form the expectation that the IGG of local governments will weaken,which leads to concerns about the bond investment of other SOEs in the region,and ultimately leads to the negative performance of relevant corporate bond market.Secondly,this paper replaces the samples of SOEs with the samples of non-SOEs to test the impact of local State-owned enterprise debt default on the bond credit Spreads of large non-SOEs in the region.Considering that the government often also has IGG for large non-SOEs in the region,the results show that the change of market investors’ expectation of the government’s IGG after the default of local SOEs leads to the negative change of the bond market.Thirdly,the results of heterogeneity analysis show that in the provinces and regions with weak financial strength and high degree of marketization development,the debt default of local SOEs have a significantly positive impact on the bond Spreads of other SOEs in the same region;The debt default of local SOEs also has a significantly positive impact on the bond Spreads of SOEs with higher rating and lower profitability in the same region.Fourthly,the study of mechanism test finds that the default of local SOEs is realized by causing liquidity changes in the bond market of other SOEs in the same region.This paper enriches the impact of local SOEs debt default on the bond market,and the research conclusion has certain reference significance for State-owned enterprise debt financing and State-owned enterprise reform.