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Does bank ownership increase firm value? Evidence from China

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  • Lin, Xiaochi
  • Zhang, Yi
  • Zhu, Ning
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    Abstract

    Direct bank ownership of company shares is believed to benefit borrowing companies in developed markets. However, little is known about how such bank relationship works in emerging markets, where the relative costs and benefits of such practice become less straightforward due to loose institutional background and weak governance. Utilizing novel data on bank equity ownership and board structure of listed companies in China, one of the leading emerging markets, we find that: 1. banks hold considerable shares of listed companies; 2. banks appoint board members through equity holdings; 3. bank ownership promotes company access to bank capital; 4. companies with banks as leading shareholders witness relatively poor operating performance. Such results are robust with alternative performance measures, industries, and sample periods. Further analysis indicates that inefficient investments resulting from bank ownership are responsible for the disappointing performance. Our results provide new insights to the debate regarding the merits of bank equity ownership of companies and emphasize how banking and corporate finance behave differently in emerging markets due to their unique institutional background

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 28 (2009)
    Issue (Month): 4 (June)
    Pages: 720-737

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    Handle: RePEc:eee:jimfin:v:28:y:2009:i:4:p:720-737

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    Web page: http://www.elsevier.com/locate/inca/30443

    Related research

    Keywords: Banking Bank ownership Valuation Emerging markets Chinese financial markets;

    References

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    1. Cull, Robert & Xu, Lixin Colin, 2005. "Institutions, ownership, and finance: the determinants of profit reinvestment among Chinese firms," Journal of Financial Economics, Elsevier, vol. 77(1), pages 117-146, July.
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    Cited by:
    1. Luo, Wei & Zhang, Yi & Zhu, Ning, 2011. "Bank ownership and executive perquisites: New evidence from an emerging market," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 352-370, April.
    2. Lu, Zhengfei & Zhu, Jigao & Zhang, Weining, 2012. "Bank discrimination, holding bank ownership, and economic consequences: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 341-354.
    3. Fan, Joseph P.H. & Huang, Jun & Zhu, Ning, 2013. "Institutions, ownership structures, and distress resolution in China," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 71-87.

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