How does bank ownership affect firm investment? Evidence from China

Hongjian Wang, Tianpei Luo, Gary Gang Tian and Huanmin Yan

Journal of Banking & Finance, 2020, vol. 113, issue C

Abstract: This study examines how holding voting shares in banks can impact the improvement of firms’ investment efficiency in the Chinese capital market. We found that bank ownership improved firms’ investment efficiency by mitigating both overinvestment and underinvestment and by improving investment sensitivity to investment opportunities. We further found that alleviation of overinvestment in firms was driven by the enhancement of corporate governance (disclosure channels). The better corporate governance in bank holding firms reduced corporate cash holdings and controlling shareholder expropriations. Moreover, we found that this bank-firm connection reduced underinvestment by mitigating financial constraints (financing channels), through the raising of more bank loans and the reduction of the cash flow sensitivity of cash holdings. This connection also served as a buffer when bank lending is tightened. Finally, we found that bank ownership had a more pronounced impact on improving investment efficiency in non-SOEs, in firms located in provinces with low marketization, and in firms without institutional investors.

Keywords: Bank ownership; Investment efficiency; Ownership structure; Corporate cash holding; Bank loan; Chinese capital market (search for similar items in EconPapers)
JEL-codes: G21 G31 G32 G34 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:113:y:2020:i:c:s037842662030008x

DOI: 10.1016/j.jbankfin.2020.105741

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