Law Enforcement and Cost of Debt – Evidence from China
Using the stagged introduction of regional specialized debt recovery courts as a quasi-natural experiment, we estimate the causal effect of law enforcement on financing cost of corporate bonds in China. With primary market issuing data, we show that the introduction of specialized courts reduces issuers’ bond financing cost by 15%. Using secondary market trading data confirms the results that the yield spreads of existing bonds reduce significantly. Exploring region-, firm- and bond- level heterogeneity, we find the effects to be much stronger when ex-ante default risk is high. Our case-level analyses further support that enforcement cost reduction in debt dispute resolution is a channel for the reduction of cost of bond. Our paper has important policy implications in light of the recent bond default wave in China, suggesting that creditors protection through highly efficient law enforcement is important for bond market development and will eventually benefit bond issuers as well.
Laura Xiaolei Liu is Boya Distinguished Professor of Peking University, and a Professor of Finance and Accounting at Guanghua School of Management, Peking University. She is the Chair of the Department of Finance, Guanghua School of Management. She received her PhD from University of Rochester. Her research interest is capital markets and empirical corporate finance. Her work has been published in leading academic journals including Journal of Political Economy, Journal of Finance, Journal of Financial Economics, Review of Financial Studies, Journal of Monetary Economics, and Management Science. In recent years her study has focused on China related topics. She received best paper awards and research excellence award many times. Before joining Guanghua, Professor Liu taught at Hong Kong University of Science and Technology and received tenure there.