State Ownership, Bank Loans, and Corporate Investment

International Review of Economics & Finance, 2014, vol. 32, issue C, pages 92-116

Posted: 8 Mar 2016 Last revised: 30 Mar 2018

See all articles by Yeqin Zeng

Yeqin Zeng

Durham University Business School, Finance and Economics

Wei Jiang

Jinan University, Department of Accounting

Date Written: June 7, 2014

Abstract

We study the effect of bank loans on Chinese publicly listed firms' investment decisions based on the underinvestment and overinvestment theories of leverage. Evidence from China is of particular importance because China is the world's largest emerging and transitional economy. At first we show that there is a negative relationship between bank loan ratios and investment for Chinese publicly listed firms. And this negative relationship is much stronger for firms with low growth than firms with high growth. Secondly, we find that both short-term and long-term loan ratios are negatively correlated with investment. However, the higher the long-term loan ratios are, the weaker the negative relationship between long-term loan ratios and investment is. Thirdly, firm ownership only matters to the effect of short-term bank loans on investment in our sample. That is, the negative relationship between short-term loan ratios and investment is weaker for SOEs than for non-SOEs. Lastly, we show that the reform of China's banking system in 2003 has not strengthened the negative relationship between bank loans and investment. Our findings suggest that although Chinese state-owned banks are severely intervened by government policies, they still have a disciplining role on firms' investment, especially in firms with low growth.

Keywords: Leverage, Underinvestment, Overinvestment, State-owned banks, Disciplining role

Suggested Citation

Zeng, Yeqin and Jiang, Wei, State Ownership, Bank Loans, and Corporate Investment (June 7, 2014). International Review of Economics & Finance, 2014, vol. 32, issue C, pages 92-116. Available at SSRN: https://ssrn.com/abstract=2743505

Yeqin Zeng (Contact Author)

Durham University Business School, Finance and Economics ( email )

Office 162 Durham University Business School
Mill Hill Lane
Durham, DH1 3LB
United Kingdom

HOME PAGE: http://https://sites.google.com/site/yeqinzenghomepage/

Wei Jiang

Jinan University, Department of Accounting

Huang Pu Da Dao Xi 601, Tian He District
Guangzhou, Guangdong 510632
China

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