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Has the Evergrande Debt Crisis Rattled Chinese Capital Markets? A Series of Event Studies and Their Implications
... In order to analyze the impact of Evergrande's bond default in September 2021 on six Asian stock indexes (to consider the possible stock market integration), we use an event study approach. Although this methodology has been widely used in the financial literature to assess the impact of unanticipated events, as we can notice, excluding the study of Altman et al. (2022), which is only focused on Chinese markets, this is the first study to apply this methodology to analyze the impact of Evergrande's September 2021 bond default on various Asian financial markets. In addition, we analyze the indexes before and after the event date and compare return means and variances to find possible differences in the behavior of the series under analysis. ...
The economic growth of China has been driven by the development of its real estate market, especially after the 2008 crisis. This growth is mostly related to the huge housing bubble and growing amounts of sovereign debt that have been redirected to corporations in the sector. Evergrande is one of those corporations; it is a Chinese company in the construction and real estate sector, a global giant with investments in many parts of the world. Its bond default in September 2021 sounded alerts in financial markets. Several news outlets spoke of the “next Lehman Brothers”, and apprehension was very high, especially in Asian markets. This research work aims to evaluate the impact of Evergrande’s bond default on six Asian stock markets, using an event study approach. The results show a strong reaction from the markets towards the event in study, even anticipating it. Furthermore, it is worth mentioning a quick reversion to “normal” behavior, indicating the rapid absorption of information by the markets.
Digital transformation is an emerging development opportunity for enterprises in the digital economy and comprehensively reflects the application of digital technology to production, operation, and management strategies. This study used data on A-share listed enterprises in Shanghai and Shenzhen from 2007 to 2022 to examine the relationship between the digital transformation of enterprises and information efficiency of the capital market. Findings revealed that digital transformation can improve the information efficiency of the capital market and that environmental uncertainty plays a more significant regulatory role. The greater the environmental uncertainty, the more enterprises with a high degree of digital transformation can promote the information efficiency of the capital market. Additional analysis showed that the promotional effect of digital transformation on the information efficiency of the capital market is better for non-state-owned enterprises and small and medium-sized enterprises. This study provides detailed insights into digital transformation and capital market information efficiency, which enriches the research related to the economic consequences of digital transformation and demonstrates the theoretical and practical value of corporate digital transformation.
Using a difference-in-difference approach, we find that restrictions placed on the CSI 300 and CSI 500 index futures trading during the recent Chinese stock market crisis deteriorated spot market quality, particularly the September trade restrictions. Our results can be explained by the sudden risk exposure faced by alpha-strategy traders who stop trading spots after the index futures trading restrictions are introduced, thus worsening the spot market quality. © 2016 Wiley Periodicals, Inc. Jrl Fut Mark
What capital allocation role can China’s stock market play? Counter to perception, stock prices in China have become as informative about future profits as they are in the US. This rise in stock price informativeness has coincided with an increase in investment efficiency among privately owned firms, suggesting the market is aggregating information and providing useful signals to managers. However, price informativeness and investment efficiency for state-owned enterprises fell below that of privately owned firms after the postcrisis stimulus, perhaps reflecting unpredictable subsidies and state-directed investment policy. Finally, evidence from realized returns suggests Chinese firms face a higher cost of equity capital than US firms.
We investigate the informational roles of foreign ownership in local credit rating agencies (CRAs) in the Chinese onshore debt market, which was the world's largest emerging debt market from 2008 to 2017. We find a robust negative relationship between the bond offering yield and foreign ownership in local CRAs, which suggests that these ratings certify the credit quality of debt issuers and thus enhance the market values of new debt issues. The information content of these ratings, however, is in contrast with the information provision role of foreign-owned CRAs (global CRAs). We find that these ratings provide no or weak better predictive power of issuers’ future credit performances than domestic CRAs. In addition, we find that stock and bond market reactions at the announcements of rating revisions made by global CRAs are not significantly different from those made by their domestic counterparts. We attribute the seemingly contradictory results to the preference for foreign brands in emerging markets and/or the improved bond liquidity associated with global CRA ratings.
Chinese housing prices rose by over 10 percent per year in real terms between 2003 and 2014 and are now between two and ten times higher than the construction cost of apartments. At the same time, Chinese developers built 100 billion square feet of residential real estate. This boom has been accompanied by a large increase in the number of vacant homes, held by both developers and households. This boom may turn out to be a housing bubble followed by a crash, yet that future is far from certain. The demand for real estate in China is so strong that current prices might be sustainable, especially given the sparse alternative investments for Chinese households, so long as the level of new supply is radically curtailed. Whether that happens depends on the policies of the Chinese government, which must weigh the benefits of price stability against the costs of restricting urban growth.
We propose a measure of systemic risk, Δ CoVaR, defined as the change in the value at risk of the financial system conditional on an institution being under distress relative to its median state. Our estimates show that characteristics such as leverage, size, maturity mismatch, and asset price booms significantly predict Δ CoVaR. We also provide out-of-sample forecasts of a countercyclical, forwardlooking measure of systemic risk, and show that the 2006:IV value of this measure would have predicted more than one-third of realized Δ CoVaR during the 2007-2009 financial crisis.
We construct housing price indices for 120 major cities in China in 2003-2013 based on sequential sales of new homes within the same housing developments. By using these indices and detailed information on mortgage borrowers across these cities, we find enormous housing price appreciation during the decade, which was accompanied by equally impressive growth in household income, except in a few first- tier cities. While bottom- income mortgage borrowers endured severe financial burdens by using price- to- income ratios over eight to buy homes, their participation in the housing market remained steady and their mortgage loans were protected by down payments commonly in excess of 35%. As such, the housing market is unlikely to trigger an imminent financial crisis in China, even though it may crash with a sudden stop in the Chinese economy and act as an amplifier of the initial shock. © 2016 by the National Bureau of Economic Research. All rights reserved.
This paper examines the equilibrium price effects of the privatization of housing assets that were previously owned and allocated by the state. I develop a theoretical framework that shows that privatization can have ambiguous effects on prices in the private market, and that the degree of misallocation of the assets prior to privatization determines the subsequent price effects. I test the predictions of the model using a large-scale housing reform in China. The results suggest that the removal of price distortions allowed households to increase their consumption of housing and led to an increase in equilibrium housing prices. (JEL L33, O18, P25, R31, R38)
The price reaction of publicly traded industrial bonds to Moody's Investors Service and Standard & Poor's bond-rating changes is investigated using a database of month-end trader quotes from Lehman Brothers for March 1985 through March 1995. All Standard & Poor's and Moody's rating changes are studied in a period from up to 12 months before the rating change to 12 months after. A unique feature of this study is the use of a data set containing recent firm-specific information that also provides a long event window. Downgraded firms reveal a significant announcement effect in both the announcement month and preannouncement period. The magnitude of downgrading effects increases dramatically as the sample moves from investment-grade to non-investment-grade firms. Samples that are restricted to rating changes that are not preceded by any rerating within six months reveal that the market reacts reliably as much as six months before an event. Upgrade effects are much weaker in magnitude and significance.
This paper examines daily excess bond returns associated with announcements of additions to Standard and Poor's Credit Watch List, and to rating changes by Moody's and Standard and Poor's. Reliably nonzero average excess bond returns are observed for additions to Standard and Poor's Credit Watch List when an expectations model is used to classify additions as either expected or unexpected. Bond price effects are also observed for actual downgrade and upgrade announcements by rating agencies. Excluding announcements with concurrent disclosures weakens the results for downgrades, but not upgrades. The stock price effects of rating agency announcements are also examined and contrasted with the bond price effects. Copyright 1992 by American Finance Association.
- K Rogoff
Measuring abnormal bond performance
- H Bessembinder
- P Collin-Dufresne