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State-ownership and bank loan contracting: evidence from corporate fraud

Haß, Lars Helge and Vergauwe, Skrålan and Zhang, Zhifang (2017) 'State-ownership and bank loan contracting: evidence from corporate fraud.' The European Journal of Finance. 1 - 22. ISSN 1351-847X

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Abstract

This paper explores the effect of borrower and lender state-ownership on the consequences of corporate fraud in the debt market. Fraud revelations can increase a firm’s information and credit risk, and are therefore expected to significantly affect future bank loan conditions. The Chinese economy provides a unique setting from which to study the influence of state-ownership on debt contracting because it is dominated by state-owned banks (SBs) and firms. Using a sample of bank loans and enforcement actions announced between 2001 and 2012, we find that, after fraud announcements, the cost of private debt increases significantly, but not for loans issued by SBs to state-owned enterprises (SOEs). Moreover, we find evidence that SBs grant, and SOEs receive, lower interest rates. Additional tests show that SOEs that received a more favorable interest rate after the announcement of fraud from a SB perform worse than other firms. These results indicate that despite the bank reforms SBs continue to favor SOEs and this could lead to sub-optimal lending.

Item Type: Article
Uncontrolled Keywords: state-ownership, corporate fraud, cost of debt, China
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Essex Business School > Essex Accounting Centre
Depositing User: Zhifang Zhang
Date Deposited: 26 May 2017 15:34
Last Modified: 01 Jul 2019 21:15
URI: http://repository.essex.ac.uk/id/eprint/19704

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