Three Essays on Corporate Asset Growth, Bond Pricing, and Implicit Government Guarantees
The purpose of my dissertation is to identify factors driving corporate bond pricing and government guarantees on corporate liabilities. In the first manuscript, I identify the driving sources of asset growth from the perspective of debt financing and examine the asset growth effect on bond pricing. There are competing views on potential drivers for corporate asset growth. Researchers in favor of optimal investment attributes a higher asset growth rate to lower cost of capital and richer investment opportunities. Alternatively, the agency problem argument attributes high asset growth to over-investments. Building on that firms often heavily rely on debt to grow their assets, we differentiate these perspectives by studying the relation between the bond yields and issuers' asset growth rates. We do not find that yields of bonds issued by high asset growth firms are lower than those of low-growth firms. Moreover, we find that bonds issued by high asset growth firms are potentially overvalued -- they experience poor performance in years afterwards. Overall, the results are aligned with the agency problem explanation for corporate asset growth.^ The second manuscript offers a novel approach to estimate the value of the implicit government guarantee by combining the contingent claim pricing with the likelihood of the government intervention. We find in our sample that the cost of this implicit protection can go beyond tens of billions of dollars with an average of about $13 million per company, per year, and it rises to about $24 million if the government is assumed to intervene with certainty. We then investigate the relationship between the implicit government guarantee and the funding costs of small and large banks. The funding costs for both small and large banks are related to the value of the implicit government guarantee. Moreover, we show that the spread of the funding costs of small banks over large banks is strongly associated with the value of the implicit government guarantee, especially after the crisis. ^ In the third manuscript, we examine the determinants of the pricing of Chinese non-government bonds and potential agency costs of implicit government guarantees. We show that the yield of central government SOE bonds is 80 bps lower than that of non-SOE bonds after controlling for bond-specific, firm-specific characteristics, and macroeconomic variables. Using equity volatility as an alternative proxy of implicit guarantee, we confirm our findings that SOE bonds enjoy lower debt financing cost. Despite the benefits of implicit government guarantees, implicit guarantees may directly influence the efficiency of SOEs through the potential agency cost on corporate managers.^
"Three Essays on Corporate Asset Growth, Bond Pricing, and Implicit Government Guarantees"
Dissertations and Master's Theses (Campus Access).