Does the Bond Market Discipline State Owned Enterprises?

Abstract

Around a tenth of the global bond market is issued by State Owned Enterprises (SOEs) that do not have shares floating on public markets. Many of them are SOE banks. Sometimes governments avoid a direct capitalization of these SOEs and instead allow them to issue debt, assuming bond markets can “discipline” the company. Nonetheless bond buyers may expect that in case the SOE defaults there will be an implicit guarantee from the Treasury, either because of “too big to fail” problems or because of contagion to the sovereign bond. In this paper we use data from global bond markets in the last 20 years finding that in fact SOEs tend to get cheaper finance, on average some 30 to 80 basis points below comparable firms. This effect seems stronger for State Owned Banks than for Industrials and part of it can be rationalized by better credit rating given fundamentals. Our central results are robust to many alternative tests and do not seem to be caused by the characteristics of the issuance or the size of the firm. The bond market perceives that holding debt SOEs is on average safer, consistent with the view of an implicit state guarantee, which has implications for banking regulation and corporate governance.