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Corporate Misconduct and the Cost of Private Debt: Evidence from China

Author

Listed:
  • Xian Gu

    (Central University of Finance and Economics)

  • Iftekhar Hasan

    (Fordham University
    Bank of Finland
    University of Sydney)

  • Haitian Lu

    (Hong Kong Polytechnic University)

Abstract

Using a comprehensive dataset of corporate lawsuits in China, we investigate the implications of corporate misconduct on the cost of private debt. Evidence reveals that firms involved in litigations obtain subsequent loans with stricter pricing terms, 15.1 percent higher loan spreads, than non-litigated borrowers. Strong political connection and repeated relationship help to flatten the sensitivity of loan pricing to litigation. Nonbank financial institutions react in stronger manner to corporate misconduct than traditional banks in pricing loans. Overall, we show that private debt holders care about borrowers’ wrongdoing in the past.

Suggested Citation

  • Xian Gu & Iftekhar Hasan & Haitian Lu, 2019. "Corporate Misconduct and the Cost of Private Debt: Evidence from China," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(3), pages 443-463, September.
    • Handle: RePEc:pal:compes:v:61:y:2019:i:3:d:10.1057_s41294-019-00099-8
    DOI: 10.1057/s41294-019-00099-8
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    Cited by:

    1. Iikka Korhonen, 2019. "Forty Years of Chinese Reforms: An Overview," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(3), pages 349-358, September.

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    More about this item

    Keywords

    Litigation; Loan spreads; Political connection; Relationship;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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