Industrial Policy and the Pricing Efficiency of Bond Issuance
LI Yudan, GUO Yating, LUO Wei
School of Economics and Management, South China Normal University; Guanghua School of Management, Peking University; HKU Business School, The University of Hong Kong
Summary:
Industrial policy has long been a crucial element of China's economic regulatory framework, guiding the optimal allocation of resources across industries and promoting sustainable economic development. The bond market, as a core component of the capital market, plays a vital role in connecting the supply and demand for funds in response to industrial policy objectives. As the market continues to expand, the Chinese bond market has become increasingly prominent in the economic system. However, a persistent challenge in the bond primary market is the phenomenon of issuance overpricing, where the price of bonds in the secondary market on their first day of trading is often significantly lower than the initial offering price. This phenomenon mainly stems from non-market behaviors by issuers and underwriters who artificially lower interest rates. As the demand side of capital, firms typically aim to issue bonds at the lowest possible cost. However, investors' concerns about risks or unmet pricing expectations often compel issuers to adopt non-market strategies, such as offering artificially low interest rates, to attract investors and secure successful issuance. Underwriters, in their pursuit of market share, may also cater to the low-interest-rate preferences of high-quality bond issuers through fee rebates and self-purchase. These non-market behaviors result in issuance overpricing and undermine the efficiency of bond issuance. They distort price discovery, hamper effective resource allocation, and pose significant challenges to the stable and high-quality development of the bond market. Therefore, addressing the issuance overpricing and enhancing the alignment between primary and secondary market prices is essential for achieving the bond market's high-quality development. This paper explores the impact of industrial policy on the pricing efficiency of corporate bonds issuance and its underlying mechanisms from the perspective of government macroeconomic regulation. Using a sample of credit bonds issued by non-financial firms from 2011 to 2020, this study finds that industrial policy decreases the issuance overpricing and improves pricing efficiency. The primary mechanism involves reducing credit and information risks faced by issuers, thereby discouraging artificially lowered coupon rates. However, underwriters' competitive incentives to secure issuance business undermine the policy's effectiveness. Heterogeneity tests reveal that the impact of industrial policy on pricing efficiency is more pronounced for bonds issued by non-state-owned firms and for long-term bonds, and when economic policy certainty is high and monetary policy is loose. Further analysis reveals that industrial policy also promotes subscription by primary market investors and enhances liquidity of bonds after listing. This research contributes to the literature in three ways. First, it enriches research on industrial policy and capital market asset pricing, a field that has predominantly focused on stock markets while paying relatively little attention to bond markets. Within the context of the issuance overpricing phenomenon, this study highlights the impact of industrial policy on pricing efficiency and the rationality of asset prices, offering valuable insights into the effectiveness of industrial policy implementation. Second, it offers new theoretical insights and empirical evidence for debates on the role of industrial policy, underscoring its positive impact on pricing efficiency of corporate bonds. Third, it reveals how government actions reshape the motivations of bond market participants, opening new avenues for improving pricing efficiency and posing significant research potential for promoting the stability and prosperous development of the bond market. This research offers important policy implications: First, when formulating industrial policies, the government should account not only for their impact on the real economy but also for their effects on the bond market, fostering a positive interaction between industry and capital markets. Second, the fundamental driver of the issuance overpricing lies in issuers' desire to raise funds at low interest rates. Policymakers should enhance disclosure requirements for firms to improve market recognition, while also strengthen regulations to curb non-market-oriented practices and raise the cost associated with rate manipulation. Finally, the coordination of industrial policy with other macroeconomic measures, such as policy certainty and monetary policy, is essential for improving bond pricing efficiency. Future research can explore the synergistic effects of other policies and offer theoretical insights for more effective macroeconomic policy coordination. Additionally, factors such as issuers' development stages, the credit rating agencies, and investor behavior warrant further exploration.
栗宇丹, 郭雅婷, 罗炜. 产业政策与债券发行定价效率[J]. 金融研究, 2025, 539(5): 152-170.
LI Yudan, GUO Yating, LUO Wei. Industrial Policy and the Pricing Efficiency of Bond Issuance. Journal of Financial Research, 2025, 539(5): 152-170.
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