The financial value of the within-government political network: Evidence from Chinese municipal corporate bonds

TL;DR

This study investigates how the political networks of Chinese municipal leaders influence bond pricing, showing that stronger networks lower yield spreads by enhancing credit ratings, especially in less developed financial and legal environments.

Contribution

It introduces a novel measure of political networks based on leaders' experience and demonstrates their impact on bond yields in Chinese municipalities.

Findings

Political networks reduce bond yield spreads.

Networks improve credit ratings of local government entities.

Effect is stronger in less developed financial and legal regions.

Abstract

This paper examines the effect of the political network of Chinese municipal leaders on the pricing of municipal corporate bonds. Using municipal leaders' working experience to measure the political network, we find that this network reduces the bond issuance yield spreads by improving the credit ratings of the issuer, the local government financing vehicle. The relationship between political networks and issuance yield spreads is strengthened in areas where financial markets and legal systems are less developed.