Hostname: page-component-586b7cd67f-t8hqh Total loading time: 0 Render date: 2024-12-02T22:29:48.407Z Has data issue: false hasContentIssue false
  • English
  • Français

Bank Loans with Chinese Characteristics: Some Evidence on Inside Debt in a State-Controlled Banking System

Published online by Cambridge University Press:  06 June 2011

Warren Bailey ,
Wei Huang  and
Zhishu Yang
Warren Bailey
Affiliation:
Johnson Graduate School of Management, Cornell University, Sage Hall, Ithaca, NY 14853. [email protected]
Wei Huang
Affiliation:
Shidler College of Business, University of Hawaii at Manoa, 2404 Maile Way, Honolulu, HI 96822. [email protected]
Zhishu Yang
Affiliation:
School of Economics and Management, Tsinghua University, Beijing, 100084, China. [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

We study a transitional economy where state-controlled banks make loan decisions based on noisy inside information on prospective borrowers, and may lend to avert unemployment and social instability. In China, poor financial performance and high managerial expenses increase the likelihood of obtaining a bank loan, and bank loan approval predicts poor subsequent borrower performance. Negative event study responses occur at bank loan announcements, particularly for borrowers measuring poorly on quality and creditworthiness, or for lenders or borrowers involved in litigation regarding loans. Our results highlight dilemmas in a state-led financial system and the local stock market’s sophistication in interpreting news.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 6 , December 2011 , pp. 1795 - 1830
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Aintablian, S., and Roberts, G. S.. “A Note on Market Response to Corporate Loan Announcements in Canada.” Journal of Banking and Finance, 24 (2000), 381–393.CrossRefGoogle Scholar
Akerlof, G. A. “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism.” Quarterly Journal of Economics, 84 (1970), 488–500.CrossRefGoogle Scholar
Allen, F.; Qian, J.; and Qian, M.. “Law, Finance, and Economic Growth in China.” Journal of Financial Economics, 77 (2005), 57–116.CrossRefGoogle Scholar
Anderson, C. W. “Financial Contracting under Extreme Uncertainty: An Analysis of Brazilian Corporate Debentures.” Journal of Financial Economics, 51 (1999), 45–84.CrossRefGoogle Scholar
Ang, J. S.; Cole, R. A.; and Lin, J. W.. “Agency Costs and Ownership Structure.” Journal of Finance, 55 (2000), 81–106.Google Scholar
Bai, C.-E.; Li, D.; Tao, Z.; and Wang, Y.. “A Multitask Theory of State Enterprise Reform.” Journal of Comparative Economics, 28 (2000), 716–738.CrossRefGoogle Scholar
Best, R., and Zhang, H.. “Alternative Information Sources and the Information Content of Bank Loans.” Journal of Finance, 48 (1993), 1507–1522.CrossRefGoogle Scholar
Billett, M. T.; Flannery, M. J.; and Garfinkel, J. A.. “The Effect of Lender Identity on a Borrowing Firm’s Equity Return.” Journal of Finance, 50 (1995), 699–718.CrossRefGoogle Scholar
Billett, M. T.; Flannery, M. J.; and Garfinkel, J. A.. “Are Bank Loans Special? Evidence on the Post-Announcement Performance of Bank Borrowers.” Journal of Financial and Quantitative Analysis, 41 (2006), 733–751.CrossRefGoogle Scholar
Billett, M. T.; Flannery, M. J.; and Garfinkel, J. A.. “Frequent Issuers’ Influence on Long-Run Post-Issuance Returns.” Working Paper, University of Florida (2008).Google Scholar
Brown, C. O., and Dinç, I. S.. “The Politics of Bank Failures: Evidence from Emerging Markets.” Quarterly Journal of Economics, 120 (2005), 1413–1444.CrossRefGoogle Scholar
Cheung, Y.-L.; Jing, L.; Rau, P. R.; and Stouraitis, A.. “Guanxi, Political Connections, and Expropriation: The Dark Side of State Ownership in Chinese Listed Companies.” Working Paper, City University of Hong Kong (2005).CrossRefGoogle Scholar
Cheung, Y.-L.; Jing, L.; Rau, P. R.; and Stouraitis, A.. “How Does the Grabbing Hand Grab? Tunneling Assets from Chinese Listed Companies to the State.” Working Paper, City University of Hong Kong (2006).Google Scholar
Cheung, Y.-L.; Rau, P. R.; and Stouraitis, A.. “Tunneling, Propping, and Expropriation: Evidence from Connected Party Transactions in Hong Kong.” Journal of Financial Economics, 82 (2006), 343–386.CrossRefGoogle Scholar
Demiroglu, C., and James, C.. “The Information Content of Bank Loan Covenants.” Working Paper, University of Florida (2007).Google Scholar
Diamond, D. W. “Financial Intermediation and Delegated Monitoring.” Review of Economic Studies, 51 (1984), 393–414.CrossRefGoogle Scholar
Diamond, D. W. “Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt.” Journal of Political Economy, 99 (1991), 689–721.Google Scholar
Diamond, D. W., and Dybvig, P. H.. “Bank Runs, Deposit Insurance, and Liquidity.” Journal of Political Economy, 91 (1983), 401–419.Google Scholar
Dinç, I. S. “Politicians and Banks: Political Influences on Government-Owned Banks in Emerging Markets.” Journal of Financial Economics, 77 (2005), 453–479.Google Scholar
Dobson, W., and Kashyap, A. K.. “The Contradiction in China’s Gradualist Reforms.” Working Paper, University of Chicago (2006).CrossRefGoogle Scholar
Durnev, A., and Kim, E. H.. “To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation.” Journal of Finance, 60 (2005), 1461–1493.Google Scholar
Eckbo, B. E. “Valuation Effects of Corporate Debt Offerings.” Journal of Financial Economics, 15 (1986), 119–151.CrossRefGoogle Scholar
Fama, E. F. “What’s Different about Banks?” Journal of Monetary Economics, 15 (1985), 29–39.CrossRefGoogle Scholar
Fields, L. P.; Fraser, D. R.; Berry, T. L.; and Byers, S.. “Do Bank Loan Relationships Still Matter?” Journal of Money, Credit and Banking, 38 (2006), 1195–1209.Google Scholar
Harvey, C. R.; Lins, K. V.; and Roper, A. H.. “The Effect of Capital Structure When Expected Agency Costs Are Extreme.” Journal of Financial Economics, 74 (2004), 3–30.CrossRefGoogle Scholar
Heckman, J. “Sample Selection Bias as a Specification Error.” Econometrica, 47 (1979), 153–161.CrossRefGoogle Scholar
James, C. “Some Evidence of the Uniqueness of Bank Loans.” Journal of Financial Economics, 19 (1987), 217–235.CrossRefGoogle Scholar
Jian, M., and Wong, T. J.. “Propping through Related Party Transactions.” Review of Accounting Studies, 15 (2010), 70–105.CrossRefGoogle Scholar
Jiang, G.; Lee, C. M. C.; and Yue, H.. “Tunneling through Intercorporate Loans: The China Experience.” Journal of Financial Economics, 98 (2010), 1–20.Google Scholar
Kang, J.-K., and Liu, W.-L.. “Bank Incentives and Suboptimal Lending Decisions: Evidence from the Valuation Effect of Bank Loan Announcements in Japan.” Journal of Banking and Finance, 32 (2008), 915–929.CrossRefGoogle Scholar
Khwaja, A. I., and Mian, A.. “Do Lenders Favor Political Connected Firms? Rent Provision in an Emerging Financial Market.” Quarterly Journal of Economics, 120 (2005), 1371–1411.CrossRefGoogle Scholar
Kim, Y. C., and Stulz, R. M.. “The Eurobond Market and Corporate Financial Policy: A Test of the Clientele Hypothesis.” Journal of Financial Economics, 22 (1988), 189–205.CrossRefGoogle Scholar
La Porta, R.; Lopez-de-Silanes, F.; and Shleifer, A.. “Government Ownership of Banks.” Journal of Finance, 57 (2002), 265–301.CrossRefGoogle Scholar
Lee, K.-W., and Sharpe, I. G.. “Does a Bank’s Loan Screening and Monitoring Matter?” Journal of Financial Services Research, 35 (2009), 33–52.CrossRefGoogle Scholar
Lummer, S. L., and McConnell, J. J.. “Further Evidence on the Bank Lending Process and the Capital-Market Response to Bank Loan Agreements.” Journal of Financial Economics, 25 (1989), 99–122.CrossRefGoogle Scholar
Mikkelson, W. H., and Partch, M. M.. “Valuation Effects of Security Offerings and the Issuance Process.” Journal of Financial Economics, 15 (1986), 31–60.CrossRefGoogle Scholar
Myers, S. C., and Majluf, N. S.. “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187–221.Google Scholar
Podpiera, R. “Progress in China’s Banking Sector Reform: Has Bank Behavior Changed? ” Working Paper, IMF WP/06/71 (2006).CrossRefGoogle Scholar
Rajan, R. G. “Insiders and Outsiders: The Choice between Informed and Arm’s-Length Debt.” Journal of Finance, 47 (1992), 1367–1400.Google Scholar
Rajan, R. G. “Why Banks Have a Future: Toward a New Theory of Commercial Banking.” Journal of Applied Corporate Finance, 9 (1996), 114–128.CrossRefGoogle Scholar
Sapienza, P. “The Effects of Government Ownership on Bank Lending.” Journal of Financial Economics, 72 (2004), 357–384.CrossRefGoogle Scholar
Slovin, M. B.; Johnson, S. A.; and Glascock, J. L.. “Firm Size and the Information Content of Bank Loan Announcements.” Journal of Banking and Finance, 16 (1992), 1057–1071.CrossRefGoogle Scholar
White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity.” Econometrica, 48 (1980), 817–838.Google Scholar