Credit risk mitigation warrants initiation and private enterprise debt default risk

Purpose This study examines the role of credit risk mitigation warrants (CRMWs) in reducing default risk in China's private bond market during rising default rates and tightening credit since 2018, particularly for financially distressed enterprises. Design/methodology/approach Focusing on credit bonds issued by private enterprises in China from 2019 to 2022, this study uses a fixed-effects panel model to test the relationship between CRMW initiation and bond default probability. Propensity score matching and placebo tests were used to verify the robustness of the findings. The role of CRMWs in reducing the default risk of firms with weak debt repayment capacity is also examined. Findings The results indicate that CRMW initiation significantly reduces bond default probability, particularly for firms facing financial distress or with weak debt repayment capacity. This aligns with the intended purpose of CRMWs: to support private enterprises that are temporarily facing difficulties but have strong market prospects. The findings remain robust after additional tests. Originality/value This study makes two main contributions: (1) it provides evidence of the real impact of CRMWs in China's bond market, offering insights distinct from credit default swap markets in developed economies; and (2) it examines the financial mechanisms through which CRMWs reduce credit risk and provides practical guidance for creditors in managing credit risk through derivatives.