Large creditors and corporate governance: the case of Chinese banks

Yiming Hu, Siqi Li, Thomas W. Lin and Shilei Xie

Review of Accounting and Finance, 2011, vol. 10, issue 4, 332-367

Abstract: Purpose - Banks are the major suppliers of external funds for companies in China. The purpose of this paper is to examine whether Chinese banks exercise effective monitoring over borrowers in two lending decisions, including loan interest rates and loan renewals. Design/methodology/approach - Using a sample of Chinese public industrial firms from 2000 to 2005, the authors perform multivariate regression analysis to investigate whether banks adjust their loan interest rates and consider loan renewal decisions in response to borrowers financial performance. The authors also examine these bank lending decisions before and after 2003, when the major banking reforms started to take place in China. Findings - A negative relation was found between the loan interest rate spread and the financial performance of borrowers. However, a negative relation was found between loan renewals and the financial performance of borrowers, consistent with firms in financial difficulties being in need of more funding and hence more likely to get its bank loans renewed. Additionally, it was found that the factors banks consider when making loan decisions vary before and after 2003. Originality/value - The authors' findings suggest that Chinese banks play a limited role in monitoring and disciplining borrowers through adjustments of loan interest rates, and that their loan renewal decisions for firms with poor financial performance highlight banks' financing, instead of monitoring role in this transition economy. These findings provide empirical evidence on bank governance in a transition economy dominated by state‐owned enterprises. The paper contributes to the literature by constructing an alternative loan renewal measure using financial statement information.

Keywords: China; Corporate finances; Banks; Loans; Interest rates; Creditors; Transition economies; Bank monitoring; Loan renewals (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:rafpps:v:10:y:2011:i:4:p:332-367

DOI: 10.1108/14757701111185326

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