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Bank Loans with Chinese Characteristics: Some Evidence on Inside Debt in a State-Controlled Banking System

Published online by Cambridge University Press:  06 June 2011

Warren Bailey ,
Wei Huang  and
Zhishu Yang
Warren Bailey
Affiliation:
Johnson Graduate School of Management, Cornell University, Sage Hall, Ithaca, NY 14853. [email protected]
Wei Huang
Affiliation:
Shidler College of Business, University of Hawaii at Manoa, 2404 Maile Way, Honolulu, HI 96822. [email protected]
Zhishu Yang
Affiliation:
School of Economics and Management, Tsinghua University, Beijing, 100084, China. [email protected]
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Abstract

We study a transitional economy where state-controlled banks make loan decisions based on noisy inside information on prospective borrowers, and may lend to avert unemployment and social instability. In China, poor financial performance and high managerial expenses increase the likelihood of obtaining a bank loan, and bank loan approval predicts poor subsequent borrower performance. Negative event study responses occur at bank loan announcements, particularly for borrowers measuring poorly on quality and creditworthiness, or for lenders or borrowers involved in litigation regarding loans. Our results highlight dilemmas in a state-led financial system and the local stock market’s sophistication in interpreting news.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 46 , Issue 6 , December 2011 , pp. 1795 - 1830
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2011

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