Debt financing, soft budget constraints, and government ownership
Evidence from China¹

Abstract

Debt financing is expected to improve the quality of corporate governance, but we find, using a large sample of public listed companies (PLCs) from China, that an increase in bank loans increases the size of managerial perks and free cash flows and decreases corporate efficiency. We find that bank lending facilitates managerial exploitation of corporate wealth in government-controlled firms, but constrains managerial agency costs in firms controlled by private owners. We argue that the failure of corporate governance may derive from the shared government ownership of lenders and borrowers, which nurtures soft budget constraints.JEL classifications: G32, G34, P34.

Do Lenders Value Corporate Social Responsibility? Evidence from China

“…The results from the extant literature may not hold for developing markets such as China where the corporate debt is primarily financed by state-controlled banks (Tian and Estrin 2007;Chen et al 2010). State-controlled banks are less concerned about economic profits and usually follow the strategic direction of the government, such as full employment, poverty relief, and environmental protection (Tian and Estrin 2007;Chen et al 2010), which suggests that state-controlled banks may assign a larger weight to CSR information when they make loan decisions than private-controlled banks. This can explain to some extent why we document a significant relationship between CSR and CDF in China whereas Goss and Roberts (2009) do not in the US.…”

“…Regarding control variables, prior literature suggests that firm size, financial leverage, state ownership, and industry membership also affect CDF (Gebhardt et al 2001;Sharfman and Fernando 2008;Wang et al 2008;Tian and Estrin 2007). We therefore include the natural logarithm of firm market capitalization (SIZE), the ratio of debt to book value of equity (LEV), the percentage of shares held by the state (STATEOWN), and industry dummy variables (IND) as controls.…”

“…The state therefore provides guarantee on the debt instruments issued by SOEs (Wang et al 2008;Tian and Estrin 2007). This suggests that SOEs generally have a lower downside business risk, and the insurance provided by corporate philanthropy against crises will be less valuable for SOEs (Zhang et al 2010a).…”

Do Lenders Applaud Corporate Environmental Performance? Evidence from Chinese Private-Owned Firms

“…Moreover, the China Banking Regulatory Commission statutorily requires state-owned banks to strictly execute green-credit policies and promote borrowers' environmental protection awareness. Debt financing is the most important financing channel for Chinese enterprises (Tian and Estrin 2007;Ye and Zhang 2011), so the Chinese context is appropriate for examining the association between corporate environmental performance and the cost of debt.…”

Institutional reforms and development of corporate governance and banking system in China

“…Therefore, giving appropriate incentives to the management becomes critical in firms in order to mitigate heightened agency problem and to motivate managers to pursue profit maximization objectives (Chow, 1997;Xu, Zhu, and Li, 2005). managers Long, 2006a,b andTian and Estrin, 2007). Despite these problems, the Chinese government has taken several steps to improve the corporate governance of firms as well as banks in recent years.…”