Compensating balance and loan bargaining power in China

Long Wu, Jing Zhang and Lei Xu

Accounting and Finance, 2024, vol. 64, issue 2, 1335-1359

Abstract: Chinese firms simultaneously have high levels of loans and cash holdings. Through listed firms on the Shanghai and Shenzhen Stock Exchanges, we establish a negative link between cash holdings and a firm's loan bargaining power, especially in regions with less bank competition, through a firm's passive response to bank requests rather than its voluntary excess cash reserves. Furthermore, state ownership, collateral, economic contribution, and reduced information asymmetry may effectively strengthen firm bargaining power and moderate the link. However, better marketisation strengthens the link. The banking sector may need to improve its efficiency through better credit rationing in future reforms.

Date: 2024
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