Leviathan as a financial godfather: Debt advantages of wholly state-owned enterprises

Abstract

Research Summary

We examine the debt advantages of wholly owned state-owned enterprises (WSOEs), due to an implicit sovereign insurance against default. Our model explains conditions that increase those advantages in bond yields. In our global sample of bonds, we find that bond issues of WSOEs, have a 57 bps discount in their yield to maturity vis-à-vis comparable corporations. The effect is even larger when we benchmark against partial state-owned firms—an effect large enough to overcome the liability of foreignness. This cheaper debt finance is stronger during crises yet disappears for sovereigns with low creditworthiness. This lower cost of debt “inflates” the profits of the median WSOE by 13%.

Managerial Summary

We examine if wholly owned state-owned enterprises (WSOEs) enjoy a lower cost of capital vis-à-vis their private counterparts when issuing bonds due to the perception that their debt is implicitly insured against default. We develop a model and undertake empirical tests to show that bond issues of WSOEs enjoy a 57 bps discount relative to private issues. This discount is large even relative to the premia companies pay when issuing bonds abroad. We also find that during crises the discount is larger as investors value the implicit insurance even more, but that it disappears for bond issues of governments with low creditworthiness. We estimate that for the median WSOE in our sample, the lower cost of capital inflates profits by 13%.