Government ownership and the cost of debt: Evidence from government investments in publicly traded firms

We investigate how government equity ownership in publicly traded firms affects the cost of corporate debt. Using a sample of bond credit spreads from 43 countries over 1991-2010, we find that government ownership is generally associated with a higher cost of debt, consistent with state-induced investment distortions, but is associated with a lower cost of debt during financial crises and for firms more likely to be distressed, when implicit government guarantees become the dominant effect. Our results are robust to controls for the endogeneity of government ownership, and we find these effects to be specific to domestic government ownership.