The positive impact of increased government bailout on weakening corporate default risk

Abstract

Abstract Along with the increasing uncertainty of the global economy and the spread of the new crown pneumonia epidemic, the risk challenges to economic development have increased significantly, and the risk of corporate debt defaults has become more pronounced. As an important component of the capital market, the bond market also began to experience credit bond defaults during this period. Since 2021 the global bond market has shown a sharp increase in defaults, with the default rate of non-state enterprise bonds significantly higher than the overall market, and the capital market has also ushered in a period of pain and accelerated credit risk release. Enterprises are on the verge of bankruptcy restructuring and urgently need the government to provide a bailout and stabilize the market. Therefore, this paper uses the financial data of Chinese listed companies from 2016-2021, constructs a relief intensity variable using the equity pledge rate of listed companies before the relief (2021), and empirically analyzes the impact of local government relief and financing cost on the default risk of listed companies using an intensity double difference model. The results of this study show that: (1) local government bailout significantly reduces the default rate of listed companies by 13%; (2) the effect of local government bailout varies significantly depending on whether listed companies have connected transactions with financing platform companies, and the increase of bailout intensity increases the return on assets of listed companies with related transactions with financing platform companies by 9.8%, which laterally reduces the default rate of corporate debt; (3) the cost of financing is an important mechanism by which local government bailouts affect the credit default rate of listed companies, with a regression correlation of 0.75; (4) the above effect is more pronounced in regions with a higher degree of marketization, with a 9% increase in the effect. The findings of this paper are important for actively managing the risk of dual corporate debt and credit defaults and enhancing the effectiveness of macroeconomic regulation during the epidemic period.