When Expectations of Implicit Government Debt Guarantees Diminished, Do Retail Stock Investors Run Away?

Prof. Joe Hong ZOU, Professor of Finance, University of Hong Kong

Date:         30 November 2022 (Wednesday)
Time:        3:00pm – 4:00pm
Venue:      Online via Zoom
Host:         Prof. Feng Tang, Assistant Professor of Accounting
Zoom Link:  https://umac.zoom.us/j/94629629755


We study the expectation of implicit government debt guarantees (IGDG) on the stock trading of retail investors, exploiting the first cases of corporate bond defaults in March 2014 in China which shocked the public’s long assumed existence of IGDG in China. Our difference-in-differences analysis shows that retail investors retreat from stocks with a higher default risk (“the treated” firms) after the credit shock compared to a matched control sample. The results are stronger for non-SOE firms, firms that rely more on one-time earnings, or firms with more liquid stocks, but are not due to industry contagion, deterioration in firm performance, or seasonal effects. Institutional investors appear to retreat from treated stocks before the shock, while large shareholders of treated firms increase their ownership after the shock. When the first default shows signs of bailout, institutional investors begin to buy the treated stocks, followed by the partial reversal of retail investors’ retreat. Taken together, the first bond default in China appears to have educated millions of retail stock investors and mitigated stock speculation to some extent, which likely improves capital allocation in the Chinese stock market.


Prof. Hong ZOU is Professor of Finance in University of Hong Kong. He obtained his PhD in Finance from University of Wales, UK. He had six-year industry experience and qualified the CPA and investment analyst exam. In addition, he was ranked as one of the HKU Scholars in the Top 1% based on Thomson Clarivate Analytics’ Essential Science Indicators in the 10-year period (2008-2018). He is consistently ranked in the top 10% of Authors on SSRN by all-time downloads. His research works appear in top finance journals (Journal of Finance, Journal of Financial Economics, Review of Financial Studies, Journal of Financial and Quantitative Analysis), top accounting journals (e.g., Journal of Accounting and Economics), top international business journals (e.g., Journal of International and Business Studies), and top insurance journals (e.g., Journal of Risk and Insurance). He won 7 international research awards, and the semifinalist for the best paper award at the 2017 FMA Annual Meeting in Boston.

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