Gambling culture, corporate risk preference and bond risk premium

In this paper, utilizing the Chinese context, we investigate whether and how the regional gambling culture affects bond risk premiums. Using a lottery-based measure of the local gambling culture, our empirical results show that this culture significantly increases the risk premium of local bonds via an increase in corporate risk preferences, including operating, investment and internal control risks. Our findings are robust to various sensitivity tests, including gambling crime measures of the gambling culture and endogeneity tests. In addition, we find that regional crackdowns on gambling, legal environment and corporate information quality effectively all restrain the bond risk premium caused by the local gambling culture. Finally, we find that only the investor-pay credit rating can identify the bond investment risk caused by the local gambling culture, while bonds issued by firms located in high gambling areas are more prone to default.