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Debt financing, soft budget constraints, and government ownership

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  • Lihui Tian
  • Saul Estrin

Abstract

Debt financing is expected to improve the quality of corporate governance, but we find, using a large sample of public listed companies (PLCs) from China, that an increase in bank loans increases the size of managerial perks and free cash flows and decreases corporate efficiency. We find that bank lending facilitates managerial exploitation of corporate wealth in government-controlled firms, but constrains managerial agency costs in firms controlled by private owners. We argue that the failure of corporate governance may derive from the shared government ownership of lenders and borrowers, which nurtures soft budget constraints. Copyright (c) 2007 The Authors Journal compilation (c) 2007 The European Bank for Reconstruction and Development .

Suggested Citation

  • Lihui Tian & Saul Estrin, 2007. "Debt financing, soft budget constraints, and government ownership," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 15, pages 461-481, July.
  • Handle: RePEc:bla:etrans:v:15:y:2007:i::p:461-481
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0351.2007.00292.x
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    References listed on IDEAS

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    1. Tian, Lihui & Estrin, Saul, 2008. "Retained state shareholding in Chinese PLCs: Does government ownership always reduce corporate value?," Journal of Comparative Economics, Elsevier, vol. 36(1), pages 74-89, March.
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    Cited by:

    1. Azzam Islam, 2010. "Bank Ownership and Corporate Performance: Evidence from Egypt," Review of Middle East Economics and Finance, De Gruyter, vol. 5(3), pages 91-118, February.
    2. Nagano, Mamoru, 2016. "The bank–firm relationship during economic transition: The impacts on bank performance in emerging economies," Emerging Markets Review, Elsevier, vol. 28(C), pages 117-139.
    3. Kangtao Ye & Ran Zhang, 2011. "Do Lenders Value Corporate Social Responsibility? Evidence from China," Journal of Business Ethics, Springer, vol. 104(2), pages 197-206, December.
    4. repec:kap:jbuset:v:143:y:2017:i:1:d:10.1007_s10551-015-2758-2 is not listed on IDEAS
    5. O’Connor, Neale G. & Vera-Muñoz, Sandra C. & Chan, Francis, 2011. "Competitive forces and the importance of management control systems in emerging-economy firms: The moderating effect of international market orientation," Accounting, Organizations and Society, Elsevier, vol. 36(4), pages 246-266.
    6. Mykhayliv, Dariya & Zauner, Klaus G., 2013. "Investment behavior and ownership structures in Ukraine: Soft budget constraints, government ownership and private benefits of control," Journal of Comparative Economics, Elsevier, vol. 41(1), pages 265-278.
    7. Dongwei Su & Xingxing He, 2012. "Ownership structure, corporate governance and productive efficiency in China," Journal of Productivity Analysis, Springer, vol. 38(3), pages 303-318, December.
    8. Borisova, Ginka & Brockman, Paul & Salas, Jesus M. & Zagorchev, Andrey, 2012. "Government ownership and corporate governance: Evidence from the EU," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 2917-2934.
    9. Richard W. Carney & Travers Barclay Child, 2015. "Business Networks and Crisis Performance: Professional, Political, and Family Ties," Tinbergen Institute Discussion Papers 15-135/V, Tinbergen Institute, revised 20 Feb 2015.
    10. repec:eee:rujoec:v:1:y:2015:i:1:p:55-80 is not listed on IDEAS
    11. Lin, Xiaochi & Zhang, Yi & Zhu, Ning, 2009. "Does bank ownership increase firm value? Evidence from China," Journal of International Money and Finance, Elsevier, vol. 28(4), pages 720-737, June.
    12. repec:eee:intman:v:23:y:2017:i:3:p:326-339 is not listed on IDEAS
    13. repec:eee:enepol:v:113:y:2018:i:c:p:478-486 is not listed on IDEAS
    14. Jiang, Wei & Zeng, Yeqin, 2014. "State ownership, bank loans, and corporate investment," International Review of Economics & Finance, Elsevier, vol. 32(C), pages 92-116.

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