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

Lars Helge Hass, Skrålan Vergauwe, Zhifang Zhang

Research output: Contribution to journalArticle

4 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)550-567
Number of pages18
JournalEuropean Journal of Finance
Volume25
Issue number6
Early online date22 May 2017
DOIs
Publication statusE-pub ahead of print - 22 May 2017

Keywords

  • state-ownership
  • corporate fraud
  • cost of debt
  • China

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