Earnings management uncertainty, implicit guarantees, and the corporate bond yield spread: Evidence from China

We examine the impact of earnings management uncertainty (EMU) on bond yield spreads in China. In the process, we decompose the bond yield spread into liquidity and default yield spreads. The findings suggest that EMU primarily drives the default yield spread of a corporate bond and that its impact on the liquidity yield spread is minimal. Our results are robust to alternative metrics of default and liquidity yield spreads and to a battery of robustness checks. In addition, we find that the implicit government guarantees from both the Chinese central and local governments partially offset the impact of EMU on overall bond yield and default yield spreads.