Debt financing, soft budget constraints, and government ownership

Lihui George Tian () and Saul Estrin

The Economics of Transition, 2007, vol. 15, pages 461-481

Abstract: Debt financing is expected to improve the quality of corporate governance, but we find, using a large sample of public listed companies (PLCs) from China, that an increase in bank loans increases the size of managerial perks and free cash flows and decreases corporate efficiency. We find that bank lending facilitates managerial exploitation of corporate wealth in government-controlled firms, but constrains managerial agency costs in firms controlled by private owners. We argue that the failure of corporate governance may derive from the shared government ownership of lenders and borrowers, which nurtures soft budget constraints. Copyright (c) 2007 The Authors
Journal compilation (c) 2007 The European Bank for Reconstruction and Development .

Date: 2007

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