Bank Financing and Corporate Governance

36 Pages Posted: 31 Aug 2015 Last revised: 11 Apr 2019

See all articles by Meijun Qian

Meijun Qian

Australian National University (ANU) - College of Business and Economics

Bernard Yin Yeung

National University of Singapore - Business School

Date Written: August 31, 2015

Abstract

Extant literature suggests that bank monitoring improves corporate governance. This paper demonstrates that inefficiency in banking can also significantly reduce the equity capital markets’ disciplinary power. Specifically, we show that in an environment in which the banking system is dominated by inefficient state-owned banks, controlling shareholders’ tunneling activity is positively associated with firms’ bank loan access. This relation is particularly strong in firms with high borrowing capacity, as measured by tangibility, and in regions where the banking industry is severely inefficient. As firms with high tunneling can continue to receive new loans with interest cost compatible to others, equity capital market disciplinary forces do not apply to them. Indeed, we further show that through tunneling, bank financing is negatively associated with future firm performance. These results suggest that, for an economy to develop mature capital markets, it is imperative to improve banking efficiency because its inefficiency dilutes the monitoring role of the market.

Keywords: bank financing, corporate governance, tunneling, loan pricing.

JEL Classification: G32, G34

Suggested Citation

Qian, Meijun and Yeung, Bernard Yin, Bank Financing and Corporate Governance (August 31, 2015). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2653530

Meijun Qian (Contact Author)

Australian National University (ANU) - College of Business and Economics ( email )

Canberra
Australia

Bernard Yin Yeung

National University of Singapore - Business School ( email )

15 Kent Ridge Drive
BIZ 1 Level 6
Singapore, 119245
Singapore
65 6516 3075 (Phone)
65 6779 1365 (Fax)

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