Entrusted Loans and Tunneling

Abstract

We examine the effect of a regulation in China that restricts perquisite consumption by managers of state-owned companies. We find that the regulation causes state-owned companies to issue more entrusted loans to other firms. Furthermore, entrusted loans issued by state-owned companies have lower interest rates and larger loan amounts. These results suggest that managers of state-owned companies use entrusted loans to extract personal benefits to compensate for the lost perquisite consumption due to the regulation.

Keywords: Entrusted Loans, SOE, Perquisite Consumption, Tunneling

JEL Classification: G23, G30, G32