Regulatory Capital Constraint and Its Effects on Price Discrimination and Default Risk: Evidence from China's Bond Market

摘要

This article examines the effects of regulatory capital constraint on price discrimination and default risk using data of bonds in China. Our research finds that there is price discrimination on non-state-owned enterprises (SOEs) in Chinese bond market and the discrimination is different for various bonds underwritten by commercial and investment banks, which is exacerbated (decreased) by powerful commercial bank (investment bank) underwriters when they have plenty of regulatory capitals. Furthermore, the price discrimination results in a rising of the issuer's default risk, especially when underwriters are commercial banks with strong market power and plenty of regulatory capitals. This finding is consistent with the market power hypothesis for commercial banks and certification role for investment banks, which means that powerful and well-capitalized commercial bank (investment bank) underwriters increase (decrease) the cost of debt of non-SOEs and the default risk of central and local SOEs. Our research is the first to reveal the coexistence of market power view and certification role of underwriters with bonds data from a transition economy.