Intra‐industry spill‐over effect of default: Evidence from the Chinese bond market

Xiaolu Hu, Haoyi Luo, Zijin Xu and Jiang Li

Accounting and Finance, 2021, vol. 61, issue 3, 4703-4740

Abstract: We investigate the intra‐industry spill‐over effect of defaults in the Chinese bond market by using a sample of public corporate debt securities for the period 2014–2018. We find that both industry portfolios and individual firms witness a strong contagion effect, which further spreads to the primary bond market, triggering a surge in the debt financing cost for default industries. Moreover, this contagion effect is stronger for low‐competition industries and regulated industries, as well as when a default happens to state‐owned enterprises. Better information access and higher bond liquidity alleviate the contagion effect, lending support to the information updates and liquidity dry‐up hypotheses.

Date: 2021
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