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

72 Pages Posted: 19 Feb 2016 Last revised: 5 Jan 2018

See all articles by Qing He

Qing He

Renmin University of China

Liping Lu

VU University Amsterdam - Department of Finance and Financial Sector Management

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; Centre for Economic Policy Research (CEPR)

Date Written: October 27, 2016

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

Suggested Citation

He, Qing and Lu, Liping and Ongena, Steven R. G., Who Gains from Credit Granted between Firms? Evidence from Inter-Corporate Loan Announcements Made in China (October 27, 2016). CFS Working Paper, No. 529, Available at SSRN: https://ssrn.com/abstract=2734657 or http://dx.doi.org/10.2139/ssrn.2734657

Qing He

Renmin University of China ( email )

Room 705
Mingde main building
Beijing, Beijing 100872
China

Liping Lu

VU University Amsterdam - Department of Finance and Financial Sector Management ( email )

De Boelelaan 1105
NL-1081HV Amsterdam
Netherlands

Steven R. G. Ongena (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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