Will Government Stock Purchases in the Last Crisis Create an Implicit Government Guarantee in the Next Crisis? Evidence from China During the COVID-19 Pandemic

This paper investigates whether the Chinese state-owned financial institutions’ (national team) bailouts in the crash of 2015, as a symbol of implicit government guarantees, were able to stabilize the market in the absence of any stock purchases (or sells) during the COVID-19 pandemic. By employing quarterly data on Chinese A-share firms from 2019Q1 to 2020Q4, we construct a difference-in-difference (DID) model and find that the increase in the idiosyncratic volatility of stocks rescued by the national team in 2015 is significantly lower than that of stocks not rescued by the national team in 2015 during the pandemic period. We further explore the economic mechanism of the stabilizing effect and find that this effect fits the “signal hypothesis” that investors regard the national team’s bailouts (shareholdings) as a trustworthy anchor point with implicit government guarantees