How Does Corporate Governance Affect Loan Collateral? Evidence from Chinese SOEs and Non‐SOEs

Abstract

We examine the effect of corporate governance on the collateral requirements for firms' bank loans in China. We find that firms with lower excess control rights and other large shareholders face lower collateral requirements, which is more pronounced in non-state-owned enterprises (SOEs) than in SOEs. Regarding board characteristics, we find that smaller board size, more independent directors, separation of the positions of CEO and chairman, and larger supervisory board size can reduce a firm's use of collateral; the effect of all the preceding characteristics is more pronounced in SOEs. Overall, our research suggests that, in China, corporate governance structures are able to affect bank-lending decisions in respect of collateral requirements and that the influence depends on the controlling shareholder type and associated agency problems.

Bringing owners back on board: A review of the role of ownership type in board governance

“…For example, state owners tend to view their investments as part of a larger political agenda such as supporting a particular industry to sustain employment or retaining control of strategic resources for national security or welfare purposes (Musacchio, Lazzarini, & Aguilera, 2015). Because of the prevalence of political motives, the state typically does not invest in firm‐specific knowledge and, similar to institutional investors, rely greatly on internal and external corporate governance mechanisms (An, Pan, & Tian, 2016).…”

“…Firms with institutional investors and family control in the United States are also associated with larger boards that devise more corporate social responsibility (CSR) engagement and diversification strategies (e.g., Cruz, Jusko, Larraza‐Kintana, & Garcés‐Galdeano, 2019; Lungeanu & Ward, 2012; Walls, Berrone, & Phan, 2012). In addition, state‐owned Chinese firms have larger boards that restrict loan collateral (An et al, 2016). Interestingly, although Goranova, Dharwadkar and Brandes (2010) find that larger boards in U.S. firms are associated with lower IPO returns, they also show evidence that institutional investors help improve such returns.…”

“…In general, the diversified portfolios of institutional owners preclude them from investing in firm-specific knowledge, thus relying more on internal and external corporate governance (Musacchio, Lazzarini, & Aguilera, 2015). Because of the prevalence of political motives, the state typically does not invest in firm-specific knowledge and, similar to institutional investors, rely greatly on internal and external corporate governance mechanisms (An, Pan, & Tian, 2016).…”

“…F I G U R E 4 Integrated framework of the role of ownership type in board governance Walls, Berrone, & Phan, 2012). In addition, state-owned Chinese firms have larger boards that restrict loan collateral (An et al, 2016). Interestingly, although Goranova, Dharwadkar and Brandes (2010)…”

Regulatory Dualism as an Alternative Trust‐Enhancing Mechanism for Dividends and Debt: Evidence from Brazil*

“…That is, leverage can act as a disciplinary mechanism for managers. Likewise, higher standards of corporate governance can lead credit providers to reduce both collateral requirements (An et al 2016) and also debt interests in loans as they can access information to assess borrowers’ ability to repay debt, which, in turn can reduce the cost of debt (Chen and Zhu 2013; Lee et al 2015). From this perspective, when there is good corporate governance, companies could prefer to maintain higher levels of debt in order to signal their intention not to expropriate investor wealth.…”