The article examines the relationship between political connections and bond pricing in China, and whether they affect the pricing of corporate bonds. Political connections can sometimes be beneficial or nonbeneficial to firms it offers a chance for investors to lend to firms at lower premiums, but it also may cause investors to have “less confidence” in disclosing politically connected firms on poor quality earnings resulting in higher risk premiums.
The provided article presented three hypothesis which were that “corporate bond spreads of politically connected firms are lower than that of nonconnected firms”, two “corporate bond spreads of politically connected firms are higher than that of nonconnected firms”, and the third hypothesis is “strong political connections are negatively related to corporate bond spreads”. These three hypotheses were examined, and the purpose of the article is to determine whether political connections matter to bondholders in china or not.
China has one of the largest transitional economies. In china they found that political connections are linked to higher corporate bond spreads. Although this was one of their findings the article explains that any effects on political connections are eliminated when the chairman and CEO are politically connected meaning that bondholders determine price based on the background of a top manager and cost vary on how connected a firm is. The article tests the presented hypothesis using the empirical model. The empirical model is a regression model that test the relationship between political connections and corporate bond spreads. Using the spread the data they obtained from 2007-2009 was consisting of 61 bond-year observations on 54 different firms.
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The information they gathered to help with their research were bond characteristics, background of top managers, and financial data from the China Stock Market and Accounting Research database. After the data was analyzed the findings were that it supported their idea that political power is crucial in the early stage after the reform of the corporate bond market. The article presented multiple charts to support the data they analyzed and those had different types of bonds as puts it also presented ratings. The table 3 that was presented represented bold holders perceive that marginal costs are greater than the marginal benefits of political connections.
The author of the article Po-Hsin Ho concluded that when the benefits are greater but lower than the costs of political connections, politically connected firms have lower bond spreads than companies that are aren’t connected. The reasoning for this is because rent-seeking incentive which is an individuals or entity’s use of company resources to obtain economic gain without benefiting society. Although there were political connections to early bond stage reform they were not directly correlated with bond spreads. This article gave an understanding on whether or not political connections matter to bond holders.
