Corporate bond defaults and cross-regional investment: Evidence from China

Abstract

In China, inadequate cross-regional investment is a challenge. Our study uses the no-bailout reform initiated in China in 2014 to test whether market-oriented reforms of this type can stimulate national economic integration. We find that following a bond default event, non-local firms tend to establish a higher proportion of subsidiaries in the region where the no-bailout reform has been implemented. This is because China's no-bailout reform signals a reduction in financial protectionism and other forms of local protectionism. We also find our main results are stronger when the impact of the bond default is greater, when local protectionism in the home region of the entering firms is higher, and when the degree of asset specificity and product market competitiveness of the entering firms are lower. Finally, we find China's no-bailout reform reduces operational risks and improves firms’ total factor productivity. Overall, our study contributes to the literature on no-bailout reform and cross-regional investment.