Two Essays on Corporate Default Risk

Abstract

The first essay directly tests the association between state ownership and firm default risk, using a sample of Chinese listed firms from 1990 to 2011. I find strong evidence that higher state ownership leads to lower default risk due to soft budget constraints. State ownership has a stronger effect when firms are facing global negative industry return. Moreover, the effect of state ownership will be more significant for firms operating in competitive industries. In the second essay, I find strong evidence for the prediction power of currency return on firm default risk. And large local currency deprecation is a major reason for the positive association between currency return and default risk. Using country-level international trade data (the sum of exports and imports) as proxy for the likelihood of using foreign currency debt, I find that currency return has a greater effect for countries that more rely on international trade.