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Marketization vs. market chase: Insights from implicit government guarantees

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  • Zhang, Xiaoqian
  • Wang, Zhiwei

Abstract

Local Government Financing Vehicles (LGFVs) and state-owned enterprises (SOEs) provide implicit guarantee during the issuing of bonds, thereby reducing their funding cost. The credit spreads are lower when issued by a LGFV with a higher administrative level. This means that implicit guarantee is also strengthened with government centralization. We also explain the anomaly of municipal corporate bonds (MCBs)’ spreads decrease after a marketization regulation of removing implicit guarantees. This paper provides strong evidence that the market will chase implicit guarantee when default wave comes even under tight government regulations.

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  • Zhang, Xiaoqian & Wang, Zhiwei, 2020. "Marketization vs. market chase: Insights from implicit government guarantees," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 435-455.
  • Handle: RePEc:eee:reveco:v:69:y:2020:i:c:p:435-455
    DOI: 10.1016/j.iref.2020.06.021
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