Time-varying default risk of Chinese-listed companies: From empirical test to theoretical conjecture

Zhaohui Qin, Xiaowan Wang, Yijie Chen, Yali Fan, Mihasina Harinaivo Andrianarimanana and Dhornor Tarir Duok Gai

Finance Research Letters, 2024, vol. 67, issue PA

Abstract: Default risk is one of the major challenges faced by the financial industry. This paper aims to investigate the dynamic of enterprise debt default risk law after Initial Public Offerings (IPO). The paper also proposes a theoretical conjecture to explain the logic of the time-varying law. To achieve this objective, the paper used panel data of non-financial enterprises in Shanghai and Shenzhen A-share markets from 2002 to 2020. We found that the debt default risk and IPO have an inverted U-shape relationship, the inflection point is at 8 years of IPO. Moreover, adding control variables and changing measurement indicators did not change the time-varying law. The theoretical conjecture showed that the default risk is low at the initial stage of IPO. Furthermore, over-investment of managers triggers IPO exuberance, and with the recognition of the credit market, can lead to an increase in the debt level of the enterprises and default risk. However, with time, default risk will decrease as the business behavior is adjusted and impulsive investment is reduced. Therefore, the debt default risk of listed companies presents a significant and robust “inverted U” characteristic over time.

Keywords: Default risk; Time-varying law; Listing exuberance; Over-investment (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:67:y:2024:i:pa:s1544612324008699

DOI: 10.1016/j.frl.2024.105839

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