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Implicit government guarantees and credit ratings

Author

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  • Dong, Yi
  • Hou, Qiannan
  • Ni, Chenkai

Abstract

Exploiting the first default of a state-owned enterprise (SOE) in China, we analyze the role of implicit government guarantees in credit ratings. We consider two causes of implicit government guarantees. First, we suggest a “too big to fail” effect by revealing positive associations between credit ratings and issuer size, number of employees and taxes paid. Second, we propose a “government link” effect by showing positive associations between credit ratings and an issuer's state ownership, indicators for SOEs and central SOEs. Importantly, after the first SOE default, both dimensions of implicit government guarantees are weakened when explaining credit rating variations. Extending to analyses of yield spreads, we find that debt pricing relies more on credit ratings after the default event, consistent with bond investors weighing credit ratings more with weakened beliefs in implicit government guarantees. Collectively, our study proposes two dimensions of implicit government guarantees in credit ratings and shows how the initial SOE default significantly changes the role of such guarantees in credit ratings.

Suggested Citation

  • Dong, Yi & Hou, Qiannan & Ni, Chenkai, 2021. "Implicit government guarantees and credit ratings," Journal of Corporate Finance, Elsevier, vol. 69(C).
  • Handle: RePEc:eee:corfin:v:69:y:2021:i:c:s0929119921001681
    DOI: 10.1016/j.jcorpfin.2021.102046
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    More about this item

    Keywords

    Implicit guarantee; Government bailout; Credit ratings; Corporate default;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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