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

64 Pages Posted: 19 Sep 2008 Last revised: 1 Sep 2012

See all articles by Warren Bailey

Warren Bailey

Cornell University; Fudan University - Fanhai International School of Finance and China Institute of Economics and Finance

Wei Huang

University of Hawaii at Manoa - Shidler College of Business

Zhishu Yang

Tsinghua University - School of Economics & Management

Date Written: January 16, 2012

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.

Keywords: bank loans, state ownership, China

JEL Classification: G21, G28, G14

Suggested Citation

Bailey, Warren B. and Huang, Wei and Yang, Zhishu, Bank Loans with Chinese Characteristics: Some Evidence on Inside Debt in a State-Controlled Banking System (January 16, 2012). Journal of Financial and Quantitative Analysis (JFQA), Vol 46, No. 6, 2011. Available at SSRN: https://ssrn.com/abstract=1269067

Warren B. Bailey (Contact Author)

Cornell University ( email )

S. C. Johnson Graduate School of Management
387 Sage Hall
Ithaca, NY 14853-6201
United States
607-255-4627 (Phone)
607-254-4590 (Fax)

HOME PAGE: http://courses.cit.cornell.edu/wbb1/

Fudan University - Fanhai International School of Finance and China Institute of Economics and Finance ( email )

China

Wei Huang

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way
Honolulu, HI 96822
United States
808-956-7679 (Phone)
808-956-9887 (Fax)

Zhishu Yang

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China
+86-10-62771769 (Phone)
+86-10-62785562 (Fax)

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