State ownership and banks’ information rents: Evidence from China

Fengyan Yu, Qi Liang and Wei Wang

The Financial Review, 2020, vol. 55, issue 2, 277-306

Abstract: In a lending relationship, a bank with an information advantage regarding its client tends to hold up the borrower and charge higher interest rates. We conjecture that state‐owned enterprises (SOEs), with worse information asymmetry, are subject to greater information rents. State‐owned banks place less emphasis on information production and hence extract lower rents compared to profit‐maximizing private banks. We use the decline of loan interest rates around the borrowers’ equity initial public offerings (IPOs) as the proxy of banks’ information rents. We find SOEs in China experience larger declines in loan interest rates around their IPOs; the central government‐controlled Big Four banks exhibit smaller declines in rates they charge, and their rate declines concentrate on loans made to SOEs.

Date: 2020
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