Anti-corruption effects on the credit risk of local financing vehicles and the pricing of Chengtou bonds: Evidence from a quasi-natural experiment in China

We investigate the causal effects of anti-corruption on the credit risk of local financing vehicles (LFVs) and the pricing of Chengtou bonds (CBs) in China. Difference-in-differences estimates show that anti-corruption decreases LFVs' earnings, thereby increasing LFVs' credit risk. This corresponds to a reduction in LFVs' nonoperating incomes, and the greatest reduction of earnings occurs among LFVs investing in public infrastructure. Finally, we find that credit risk mispricing occurs in the primary market.