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How does bank ownership affect firm investment? Evidence from China

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  • Wang, Hongjian
  • Luo, Tianpei
  • Tian, Gary Gang
  • Yan, Huanmin

Abstract

This study examines how holding voting shares in banks can impact the improvement of firms’ investment efficiency in the Chinese capital market. We found that bank ownership improved firms’ investment efficiency by mitigating both overinvestment and underinvestment and by improving investment sensitivity to investment opportunities. We further found that alleviation of overinvestment in firms was driven by the enhancement of corporate governance (disclosure channels). The better corporate governance in bank holding firms reduced corporate cash holdings and controlling shareholder expropriations. Moreover, we found that this bank-firm connection reduced underinvestment by mitigating financial constraints (financing channels), through the raising of more bank loans and the reduction of the cash flow sensitivity of cash holdings. This connection also served as a buffer when bank lending is tightened. Finally, we found that bank ownership had a more pronounced impact on improving investment efficiency in non-SOEs, in firms located in provinces with low marketization, and in firms without institutional investors.

Suggested Citation

  • Wang, Hongjian & Luo, Tianpei & Tian, Gary Gang & Yan, Huanmin, 2020. "How does bank ownership affect firm investment? Evidence from China," Journal of Banking & Finance, Elsevier, vol. 113(C).
    • Handle: RePEc:eee:jbfina:v:113:y:2020:i:c:s037842662030008x
    DOI: 10.1016/j.jbankfin.2020.105741
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    More about this item

    Keywords

    Bank ownership; Investment efficiency; Ownership structure; Corporate cash holding; Bank loan; Chinese capital market;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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