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The flight to safety during credit recovery: The role of implicit government guarantees

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  • Liu, Tianming
  • Xiong, Haifang
  • Li, Yifei
  • Wang, Zhiqiang

Abstract

This paper examines the investor flight-to-safety phenomenon during the credit recovery period following corporate bond defaults. We find that implicit government guarantee (IGG) bonds crowd out non-implicit government guarantee (non-IGG) bonds in the Chinese corporate bond market at the provincial level. The crowding-out effect is stronger in a province with scarce bank credit resources. In contrast, the crowding-out effect disappears when the bonds are explicitly guaranteed by a third-party or if the default event is triggered by a state-owned enterprise (SOE). This finding is robust to various maturity terms, alternative samples, propensity score matching and placebo tests. Our evidence highlights the significant role of implicit government guarantees in the crowding-out effect during the credit recovery period.

Suggested Citation

  • Liu, Tianming & Xiong, Haifang & Li, Yifei & Wang, Zhiqiang, 2023. "The flight to safety during credit recovery: The role of implicit government guarantees," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:pacfin:v:79:y:2023:i:c:s0927538x23000793
    DOI: 10.1016/j.pacfin.2023.102013
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    More about this item

    Keywords

    The flight to safety; Credit recovery; Implicit government guarantees; Government support;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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