Bank Loans with Chinese Characteristics: Some Evidence on Inside Debt in a State-Controlled Banking System
University of Hawaii at Manoa - Shidler College of Business
Tsinghua University - School of Economics & Management
January 16, 2012
Journal of Financial and Quantitative Analysis (JFQA), Vol 46, No. 6, 2011
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.
Number of Pages in PDF File: 64
Keywords: bank loans, state ownership, China
JEL Classification: G21, G28, G14Accepted Paper Series
Date posted: September 19, 2008 ; Last revised: September 1, 2012
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