SOE Defaults and Market Discipline——Evidence from Local SOE Bond Defaults in China
We investigate the impact of state-owned enterprise(SOE)defaults on strengthening market discipline.Using China's bond market data between 2014-2021 and difference-in-differences re-gressions,we find that default events significantly reduce local SOEs'bond issuance and their interest-bearing liabilities,with a negative spillover to the issuance of municipal corporate bonds.This effect is long-term and is more pronounced among local SOEs with larger credit spreads in the secondary market,indicating that the rising credit risk perceived by investors constrains SOE bond issuance.Default events increase investors'sensitivity to SOE credit risks and strengthen the market discipline of SOE borrowing.
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