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Published in: Public Choice 1-2/2024

14-10-2023

The impacts of political uncertainty on public financing costs: evidence from anti-corruption investigations in China

Authors: Haoyu Gao, Fukang Chen, Yiling Ouyang

Published in: Public Choice | Issue 1-2/2024

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Abstract

Our study investigates the impact of local political uncertainty on public financing costs in China. By examining a series of unexpected turnovers of municipal government leaders, we find that the offering yield spreads of municipal corporate bonds increase by around 23 basis points shortly following an anti-corruption investigation and reverse afterward. Indicators show that the anti-corruption investigation escalates the short-term uncertainty about government actions. The pricing effect is stronger for issuers with higher exposure to government policies or lower financial resilience. A transparent information environment alleviates the impact. In contrast, temporary government inefficiency does not explain the increase in yield spreads. Our findings suggest that political uncertainty is a determinant of public financing costs.

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Appendix
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Footnotes
1
In our empirical specification, the municipal government leaders consist of the municipal government’s secretary of the Communist Party of China (CPC) committee, deputy secretaries of the CPC, the mayor, and deputy mayors, as they are leaders of the municipality who possess dominant influences on local policies and resource allocations.
 
2
Data source: The 2013 Report of Open Government Information from the Central Commission for Discipline Inspection (https://​www.​ccdi.​gov.​cn/​xxgkn/​xxgknb/​201405/​t20140506_​40451.​html). The Eight-point Decision on Improving Party and Government Conduct was issued at the Political Bureau of the CPC Central Committee meeting on December 4, 2012. It is targeted at bureaucratism, hedonism, extravagance, and opposing mindsets and acts of privilege seeking. It covers the following main areas: doing better research and analysis and truly understanding actual conditions when doing grassroots-level studies; streamlining meetings and improving the way meetings are conducted; making documents and briefing papers more concise and improving writing styles; standardizing procedures for working visits abroad; improving security guard work and continuing to observe the principle of doing what improves relations with the people; improving news report; having strict rules on the publication of articles; and promoting frugality and the strict observance of rules on incorruptibility in government. (Source: http://​keywords.​china.​org.​cn/​2019-04/​18/​content_​74696561.​htm).
 
3
Data source: Transparency International. https://​www.​transparency.​org/​en/​cpi/​2011.
 
4
According to the law of the People’s Republic of China on civil servants, civil servant cadres are divided into ten levels: (1) national leaders (e.g. general secretary of the CPC Central Committee and premier of the State Council), (2) deputy-national leaders (e.g. members of the Political Bureau of the CPC Central Committee), (3) provincial-ministerial level (e.g. minister and governor of province), (4) deputy-provincial-ministerial level (e.g. vice-minister, deputy governor of province), (5) bureau-director level (e.g. secretary of CPC of prefecture-level city and mayor of prefecture-level city), (6) deputy-bureau-director level (e.g. deputy secretary of CPC of prefecture-level city and deputy mayor of prefecture-level city), (7) division-head level (e.g. secretary of CPC of county and county chief), (8) deputy-division-head level (e.g. deputy secretary of CPC of county and deputy county chief), (9) section-head level (e.g. secretary of CPC of town and town chief), and (10) deputy-section-head level (e.g. deputy secretary of CPC of town and deputy town chief).
 
5
As explained in sub-Sect. 2.1, the public data shows that all the investigated mayors and municipal party committee secretaries in our sample are dismissed shortly following the announcement of the investigation. Thus, we use “the anti-corruption investigation” and “turnover” interchangeably in the rest of this paper to describe our setting.
 
6
In practice, as the CCDI only discloses cadres above the deputy-bureau-director levels, we define non-top officials as other officials above the deputy-bureau-director level in municipal governments. We discuss the effect of investigations on such officials separately in the robustness test sub-section.
 
7
This sample includes only mayors and party committee secretaries as the information of their turnover and successor is officially disclosed.
 
8
One additional supporting fact is that the issuance and repayment of MCBs are closely linked. LGFVs’ investments are mainly large-scale, long-cycle, and low-return infrastructure projects, relying heavily on debt financing. Chen et al. (2020) show that during 2004–2015, over a quarter of the MCBs are issued for the repayment of previous debts, and the proportion has risen rapidly over time due to the tightening of bank credit.
 
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Metadata
Title
The impacts of political uncertainty on public financing costs: evidence from anti-corruption investigations in China
Authors
Haoyu Gao
Fukang Chen
Yiling Ouyang
Publication date
14-10-2023
Publisher
Springer US
Published in
Public Choice / Issue 1-2/2024
Print ISSN: 0048-5829
Electronic ISSN: 1573-7101
DOI
https://doi.org/10.1007/s11127-023-01111-7

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