Analysis of corporate bond spreads in pre- and post-default periods: Is there a Moral Hazard in Chinese Corporate Bond Market?

Abstrakt

The aim of this paper is to understand the underlying processes that occurred in Chinese corporate bond market following the first-ever corporate bond default. To author’s knowledge, this paper is among the first ones to combine and employ a comprehensive database on corporate bonds, ownership and financial information for China capital markets. First, the paper analyses the rapid development of Chinese corporate bond market, discusses its future opportunities and underlying risks. The paper also tackles the hypothesis of no or just partially implied default risk in the corporate market in China. The results from Fama-MacBeth regression clearly rejects the hypothesis, as it was found out that, among others, that profitability and leverage of a given company significantly affect corporate spreads and there are signs of riskprice correction in post-default periods. Also, this paper is first to quantify the effects of ownership and “illiquidity premiums” that are not common for developed bond markets, but exist in the underdeveloped Chinese corporate bond market. Lastly, the importance of ownership through time is discussed, while results suggest that in post-default period the effect of ownership evens out, meaning that credit risk of both private and non-private companies is now priced on a more similar, but still different basis. The proposed model successfully combines macroeconomic, corporate and bond-specific information, while results are consistent and robust across different estimation procedures.