In recent decades, over 40% of dollar-denominated corporate bonds have been issued by non-US firms. Strikingly, these foreign issuers face an extra discount of 20 bps than their US counterparts. While standard risks fail to account for the discount, the Economic Policy Uncertainty index from Baker, Bloom, and Davis (2016) can explain a substantial portion of this discrepancy, consistent with uncertainty-based model calibrations. Moreover, such foreign discount (USA effect) dominates the dollar safety premium (USD effect). My findings highlight the foreign discount effect in interna- tional corporate bonds, particularly amidst escalating global economic instability and uncertainty.

While previous research has delved into the relationship between political uncertainty and the aggregate cross-border flows of capital, there remains a notable gap in our understanding of how political uncertainty affects firm ownership structure within foreign direct investment (FDI) projects, specifically concerning the intensive margin. In this study, we commence by introducing a stylized model, wherein a risk-averse foreign investor teaming up with a local producer is concerned about the political risk associated with the provision of public goods by the local government. Our analysis demonstrates that the foreign investor, acting as a residual claimant, allocates a greater proportion of revenues to the local partner when local policy conditions are more uncertain. This strategic decision indirectly locks in local government commitment to the international joint venture, thereby mitigating the negative influence of political uncertainty. Subsequently, we test our theoretical framework by employing a unique dataset that encompasses city-level political turnovers and firm-level incentive structures in the context of China. The results unveil robust evidence substantiating that uncertainty arising from local political turnover significantly affects the revenue-sharing agreements between foreign investors and their local partners within the international joint production.

Using political turnovers in mayoral appointments at the prefecture-city level in China, we show that investors in the municipal corporate bond market price their concerns for rising local political uncertainty into bonds and relocate capital toward other corporate bonds issued by local firms. Municipal/non-municipal corporate bond issue spreads increase (decrease) by 8.9 (14) basis points before the expected political turnover of mayors and reverse afterwards. The effect is more prominent for bonds issued in cities with investors who have a strong local preference, suggesting investors switch from MCBs to local non-MCBs in their bond holdings. The pricing effect is also stronger for bonds issued in regions with more developed financial markets and bonds with lower credit ratings. Lastly, bond market participants only price in the political risk induced by the turnovers of politician with direct involvement in local economic activities.

After the Chinese stock market dropped one-third in three weeks in June 2015, reportedly driven by lack of liquidity due to the fire sales by margin buyers, the government used hundreds of billions of dollars to purchase shares directly in the secondary market. We validate that margin trading is associated with the surge of stock market before the crisis. We find that firms in systemically important industries, firms with more political ties, and firms with high risk of falling into liquidity spiral are more likely to be rescued. More importantly, compared with matched un-rescued firms, rescued firms did not have higher stock return, but experienced higher volatility, lower liquidity, and lower price efficiency afterwards. Market quality even deteriorated further after the subsequent sale of the purchased shares. Last, rescued firms experience a modest decline in operational performance, while capital structure and investment remained the same. Our evidence suggest that a direct purchase rescue in the secondary stock market could generate serious unintended consequences.