 Implicit government guarantees and credit ratingsYi Dong, Qiannan Hou and Chenkai Ni Journal of Corporate Finance, 2021, vol. 69, issue C Abstract: Exploiting the first default of a state-owned enterprise (SOE) in China, we analyze the role of implicit government guarantees in credit ratings. We consider two causes of implicit government guarantees. First, we suggest a “too big to fail” effect by revealing positive associations between credit ratings and issuer size, number of employees and taxes paid. Second, we propose a “government link” effect by showing positive associations between credit ratings and an issuer's state ownership, indicators for SOEs and central SOEs. Importantly, after the first SOE default, both dimensions of implicit government guarantees are weakened when explaining credit rating variations. Extending to analyses of yield spreads, we find that debt pricing relies more on credit ratings after the default event, consistent with bond investors weighing credit ratings more with weakened beliefs in implicit government guarantees. Collectively, our study proposes two dimensions of implicit government guarantees in credit ratings and shows how the initial SOE default significantly changes the role of such guarantees in credit ratings. Keywords: Implicit guarantee; Government bailout; Credit ratings; Corporate default (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:69:y:2021:i:c:s0929119921001681 DOI: 10.1016/j.jcorpfin.2021.102046 Access Statistics for this article Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter More articles in Journal of Corporate Finance from Elsevier |
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