Government social capital and bond credit ratings

Abstract

Few studies have explored the impact of heterogeneous government investment on corporate bond ratings from the perspective of government social capital allocation. This paper examines the bond market's response to government social capital allocation, utilizing empirical data from the bond ratings of listed companies issued between 2008 and 2020. The analysis begins with a rational explanation, conceptual definition, and index construction of government social capital. The empirical research finds that government social capital allocation significantly enhances corporate credit ratings. Mechanism tests reveal that local governments provide “government support” signals through short-term and long-term borrowing, enabling firms to secure more long-term loans and reduce their default risk. These signals are captured by rating agencies, which then influence the rating outcomes. Heterogeneity tests indicate that the positive impact of government capital allocation on ratings is more pronounced during periods of corporate financial distress. Furthermore, foreign rating agencies are better able to capture signals of government social capital allocation, and their independence confirms that high ratings are not the result of rating inflation.