The impact of SOE defaults on municipal corporate bond spreads in China

Zhilin Zhang

Finance Research Letters, 2025, vol. 75, issue C

Abstract: The rising defaults of state-owned enterprises (SOEs), including local government financing vehicles (LGFVs) and other SOEs, challenge the long-held belief in government bailouts and cause risk contagion in China's bond market. This study investigates the impact of SOE defaults on the spread of newly issued municipal corporate bonds, which were been widely perceived as quasi-municipal bonds. Using a sample of 5,812 municipal corporate bonds matched to local default shocks from 2016 to 2019, our difference-in-differences (DID) analysis shows that LGFV defaults significantly widen municipal bond spreads, while defaults of other SOEs narrow them. Mechanism analyses suggest that these contrasting effects are driven by investors' updated beliefs in bailouts and the local bias of institutional investors.

Keywords: Corporate defaults; Risk contagion; Municipal corporate bonds; Implicit guarantee; Local bias (search for similar items in EconPapers)
JEL-codes: G12 G14 G18 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:75:y:2025:i:c:s1544612325000844

DOI: 10.1016/j.frl.2025.106819

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