Emerging Stock Market Integration and Corporate Bond Credit Spreads

Stock market integration into the world financial markets has been a common and important practice in emerging countries over the past several decades. Relying on the staggered inclusion of China A-shares into MSCI indexes, we employ a difference-in-differences analysis and find that bond credit spreads of firms significantly decrease after the firms’ stock securities are included in the MSCI indexes. We also find that stock market integration reduces credit spreads by improving the stock liquidity, firm reputation, and alleviating information asymmetry. The effect is more pronounced among firms with greater financial constraints or higher performance volatility. Overall, our study provides evidence that emerging stock market integration can generate bond market benefits for firms.