Bond default risk transmission through a common underwriter: evidence from China

Abstract

Using samples of corporate bonds issued by Chinese A-share firms from 2014 to 2021, we examine whether information about bond defaults transmits to other bonds underwritten by a common underwriter. We document that during the underwriting process for a new corporate bond, if any prior bonds underwritten by the same underwriter have defaulted, the yield spread of the new corporate bond increases significantly. Specifically, such a new bond, on average, has a yield spread that is 16.8 basis points higher than one without a common underwriter. The results suggest that investors perceive the default risk of a new bond increases due to a deteriorated reputation of the underwriter. Additional analyses suggest that the adverse effect of the new bond yield spread is less salient when an underwriter has a strong reputation, is state-owned, or has foreign shareholding; the issuer is state-owned or dual listed overseas. Overall, default information in the bond market transmits through common underwriters.