Who Gains from Credit Granted between Firms? Evidence from Inter-Corporate Loan Announcements Made in China

Abstract

Who gains from inter-corporate credit? To answer this question we measure the impact of the announcements of inter-corporate loans in China on the stock prices of the firms involved. We find that the average abnormal return for the issuers of inter-corporate loans is significantly negative, whereas it is positive for the receivers. Firms issuing inter-group loans may be perceived by investors to have run out of worthwhile projects to finance, although the loans may bring benefits to these firms through the high interest revenues involved. Firms receiving these inter-group loans are being certified as creditworthy borrowers, although the cost on these loans may be high. Issuance of intra-group loans on the other hand may signal the propping up of financially distressed subsidiaries and their resultant expropriation in the future and the firms granting and receiving such loans will be assessed accordingly. Subsequent investment and firm performance confirms these immediate valuations as overall accurate.

Keywords: Entrusted loan, inter-corporate loan, credit misallocation, certification

JEL Classification: G30, G140, G210