Date of Award
Doctor of Philosophy in Business Administration
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.
The corporate bond sector has grown tremendously over the past decade. Rapid growth in Chinese corporate indebtedness and corporates ability to pay back their liabilities have become a persistent concern for regulators and investors in recent years. In the third manuscript, we examine the determinants of the pricing of Chinese corporate bonds and potential agency costs arising from implicit government guarantees (IGG) for state owned enterprises (SOEs). We show that the yield of central government SOE bonds is 85 bps lower than that of non- SOE bonds after controlling for firm-specific, bond-specific characteristics, and macroeconomic variables. Further, quantifying IGG with (the lack of) bond yield sensitivity to equity volatility, we present evidence on the dark side of IGG high IGG firms are subject to greater agency costs; they are more likely to over-invest to negative NPV project, suffering poor operating performance.
Li, Yifei, "Three Essays on Corporate Asset Growth, Bond Pricing, and Implicit Government Guarantees" (2018). Open Access Dissertations. Paper 728.
Available for download on Friday, April 17, 2020