The Effect of Government Reference Bonds on Corporate Borrowing Costs: Evidence from a Natural Experiment

Mark J. Flannery (), Claire Yurong Hong () and Baolian Wang ()
Additional contact information
Mark J. Flannery: Warrington College of Business, University of Florida, Gainesville, Florida 32611
Claire Yurong Hong: Shanghai Advanced Institute of Finance, Shanghai 200052, China
Baolian Wang: Warrington College of Business, University of Florida, Gainesville, Florida 32611

Management Science, 2023, vol. 69, issue 7, 4051-4077

Abstract: Government bonds might provide reference entities that reduce corporate bond yields. We study China’s 2017 issuance of two U.S. dollar (USD)-denominated sovereign bonds when there were (effectively) no outstanding USD sovereigns. We find that Chinese corporate USD bonds experienced a four- to nine-basis-point decline in yield spreads, whereas corporate renminbi (RMB) bonds did not. The effect was stronger for corporate bonds with maturities similar to those of the USD sovereigns. Further consistent with the reference effect, USD-denominated corporate bonds experienced declines in bid-ask spreads and volatility; corporate bond yield spread changes became more sensitive to sovereign yield innovations; and the less-informed foreign mutual funds significantly increased their holdings of offshore USD Chinese corporate bonds. Limited evidence indicates that new corporate bond maturities shifted toward the sovereign bonds’ maturity after their issuance.

Keywords: reference bond; China; corporate borrowing (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2022.4499 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:69:y:2023:i:7:p:4051-4077

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().