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The Informational Role of Ownership Networks in Bank Lending

Published online by Cambridge University Press:  31 January 2022

Haoyu Gao ,
Hong Ru Open the ORCID record for Hong Ru [Opens in a new window]  and
Xiaoguang Yang
Haoyu Gao
Affiliation:
Renmin University of China [email protected]
Hong Ru*
Affiliation:
Nanyang Technological University
Xiaoguang Yang
Affiliation:
Chinese Academy of Sciences [email protected]
*
[email protected] (corresponding author)
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Abstract

This article documents novel large-sample evidence on the informational role of interfirm ownership networks in bank lending. Using comprehensive loan-level data in China, we find that banks’ internal loan ratings at issuance predict subsequent delinquent events more accurately when borrowers are connected to banks’ existing customers via ownership networks. In post-issuance monitoring for delinquent loans, banks with access to ownership networks manage to downgrade their initial ratings before late payments. These findings suggest that ownership networks facilitate the transmission of private information for bank lending. Moreover, ownership networks are more important for transmitting information related to small and medium enterprises.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 8 , December 2022 , pp. 2993 - 3017
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank an anonymous referee, Jules van Binsbergen, Kaiji Chen, Tarun Chordia, Zhi Da, Hans Degryse, Ruediger Fahlenbrach, Fangjian Fu, Jarrad Harford (the editor), Shiyang Huang, Xing Huang, Yi Huang, Jun-Koo Kang, Oğuzhan Karakas, Weikai Li, Chen Lin, Shu Lin, Dong Lou, Xiaorong Ma, Paul Malatesta, Lin Peng, Yaxuan Qi, Jun Qian, Wenlan Qian, Shikhar Singla, Zheng Michael Song, Rong Wang, Shang-Jin Wei, and Liyan Yang for their helpful comments. This article benefited hugely from conference discussants and participants at the 2018 NTU Finance Conference, CIRF 2018 Conference, TFA 2018 Conference, GRU 2018 Conference on China’s Economic Reforms, China’s Economy and Financial Markets 2018, International Workshop on Financial Stability in a New Era, 13th Conference on Asia-Pacific Financial Markets, 31st Australasian Finance and Banking Conference, and CESifo Workshop 2019, as well as seminar participants at SMU, Renmin University, and CUHK Brown Bag. Ru acknowledges the financial support from Ministry of Education, Singapore, under its Tier 1 RG134/20. Gao acknowledges the financial support from the National Natural Science Foundation of China (No. 71702207). Yang acknowledges the financial support from the National Natural Science Foundation of China (Nos. 71850008 and 71532013). The views are our own, and we are solely responsible for any errors.

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