Intra-industry Spill-Over: Evidence from Chinese Bond Default

Abstract

We investigate the intra-industry spill-over effect of bond defaults on the price of stocks, outstanding bonds and new bond issuances in China, the largest emerging debt market. We use a sample of A-shares and public corporate debt securities from 2006 to 2018. In the stock market, we find significantly negative reactions from individual industry rivals to industry default while weak reaction from the industry portfolios. In the bond market, both individual firms and industry portfolios witness a strong contagion effect. This contagion effect further spreads to the primary bond market, triggering a surge in the financing cost of the default firm’s competitors after the default. In addition, our study sheds lights on a rich pattern of correlations across default events, which is helpful in improving the understanding of security pricing models and the efficiency of information transfer across markets.