Does Bank Ownership Imply Efficient Monitoring? Evidence from Bank Lending and Firm Investment Efficiencies in China

Abstract

This study investigates the effect of bank ownership on lending and firm investment efficiencies to give reasons for the mixed evidence that exists on the impact of bank ownership on firm performance. Using China’s listed firms as an example, we find that bank ownership reduces the efficiency of bank lending and harms investment efficiency for state-owned enterprises (SOEs), while simultaneously relating to optimal lending decisions and enhanced investment efficiency for non-SOEs. Our findings suggest that banks monitor non-SOEs effectively, but are less effective at monitoring SOEs. We document that banks’ ex post monitoring on non-SOEs’ investment policy results from their more effective ex ante monitoring of their lending decisions. Further analysis suggests that bank ownership hurts firm performance for SOEs while enhancing firm performance for non-SOEs. Overall, we document that in an emerging market where SOEs and non-SOEs co-exist, bank ownership affects firm performance by influencing the lending decision and firm investment policy, while the effectiveness of their monitoring varies with the firm’s ownership structure.

Keywords: bank ownership, lending efficiency, investment efficiency, SOEs and non-SOEs, conflict of interests, China

JEL Classification: G31, G34, G21