Real effect of bond yield liberalization on corporate investment

Abstract

This paper provides evidence on the real effect of bond yield liberalization from the perspective of firms’ capital expenditure. Using the break of rigid payment in the Chinese bond market, we find that treated firms’ investments decrease after bond yield liberalization. We argue that firms’ expectation of future financial constraints changes due to the liberalization of bond yield. To verify the mechanism, we present that the effect of bond yield liberalization is more pronounced for firms with severer financial constraints, firms with fewer alternative financing channels, and firms non-state-owned. Overall, we provide a possible dark side of bond market liberalization.