Target Setting and Allocative Inefficiency in Lending: Evidence from Two Chinese Banks

40 Pages Posted: 17 Sep 2018

See all articles by Yiming Cao

Yiming Cao

Boston University

Raymond J. Fisman

National Bureau of Economic Research (NBER); Boston University

Hui Lin

Nanjing University

Yongxiang Wang

University of Southern California - Marshall School of Business

Date Written: August 2018

Abstract

We study the consequences of month-end lending incentives for Chinese bank managers. Using data from two banks, one state-owned and the other partially privatized, we show a clear increase in lending in the final days of each month, a result of both more loan issuance and higher value per loan. We estimate that daily end-of-month lending is 95 percent higher in the last 5 days of each month as a result of loan targets, with only a small amount plausibly attributable to shifting loans forward from the following month. End-of-month loans are 2.1 percentage points (more than 16 percent) more likely to be classified as bad in the years following issuance; a back-of-the-envelope calculation suggests that the incremental loans made in order to hit targets are 26 percent more likely to eventually turn bad. Our work highlights the distortionary effects of target-setting on capital allocation, in a context in which such concerns have risen to particular prominence in recent years.

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Suggested Citation

Cao, Yiming and Fisman, Raymond and Lin, Hui and Wang, Yongxiang, Target Setting and Allocative Inefficiency in Lending: Evidence from Two Chinese Banks (August 2018). NBER Working Paper No. w24961. Available at SSRN: https://ssrn.com/abstract=3244244

Yiming Cao (Contact Author)

Boston University

595 Commonwealth Avenue
Boston, MA 02215
United States

Raymond Fisman

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Hui Lin

Nanjing University

Yongxiang Wang

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA 90089
United States

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