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Do regional trusts alleviate bond market risks? Evidence from the Chinese municipal corporate bond pricing

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  • Cao, Xiao
  • Gong, Xiaomin
  • Gu, Runsheng
  • Li, Yuhang
  • Liu, Xinyuan

Abstract

Municipal corporate bonds have attracted significant attention due to their pricing mechanisms and reflect China's distinct financial landscape. Existing research has highlighted the influence of informal institutional factors on bond pricing. This study introduces the social trust index to measure regional trust levels and assesses its correlation with municipal corporate bond issuance pricing. The empirical analysis indicates that higher regional trust levels are significantly associated with reduced issuance credit spreads for municipal corporate bonds. The relationship is moderated by local economic development and the strength of implicit government guarantees. Employing the “Yongmei” event as a case study, this research explores the dynamics of bond pricing mechanisms following a reduction in government implicit guarantees and finds that a weakening of these guarantees intensifies the influence of regional trust on credit spreads. Additionally, default events are observed to have spillover effects, impacting neighboring provinces and the overall market. This research extends the investigation of regional trust's pricing mechanisms to the municipal corporate bond market, thereby enriching the study of informal institutions' impact on financial market pricing. The findings underscore the importance of effectively harnessing market mechanisms by governments to mitigate risks in the municipal corporate bond sector.

Suggested Citation

  • Cao, Xiao & Gong, Xiaomin & Gu, Runsheng & Li, Yuhang & Liu, Xinyuan, 2024. "Do regional trusts alleviate bond market risks? Evidence from the Chinese municipal corporate bond pricing," International Review of Financial Analysis, Elsevier, vol. 96(PB).
    • Handle: RePEc:eee:finana:v:96:y:2024:i:pb:s1057521924006422
    DOI: 10.1016/j.irfa.2024.103710
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