Do Sovereign Bonds Benefit Corporate Bonds in Emerging Markets

We analyze the impact of emerging-market sovereign bonds on emerging-market corporate bonds by examining their spanning enhancement, price discovery, and issuance effects. We find that the effect of spanning enhancement is positive and large; over one-fifth of the information in corporate yield spreads is traced to innovations in sovereign bonds; and most of these effects are due to discovery and spanning of systematic risks. Further, issuance of sovereign bonds, controlling for endogeneity of market-timing decisions, lowers corporate yield and bid-ask spreads. Our results indicate that sovereign securities act as benchmarks and suggest they promote a vibrant corporate bond market. (JEL G10, G12, G14) Corporations in emerging market countries, large or small, typically do not depend on bond markets to raise capital because emerging bond markets are extremely under-developed. To increase these corporations ’ access to external capital and to facilitate the growth of the bond market, many emerging market governments believe that they first need to establish an active sovereign bond market. Their argument is that sovereign bonds provide benchmarks against which to value corporate bonds, and hence serve as catalysts for the develop