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

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  • Lars Helge Haß
  • Skrålan Vergauwe
  • Zhifang Zhang

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.

Suggested Citation

  • Lars Helge Haß & Skrålan Vergauwe & Zhifang Zhang, 2019. "State-ownership and bank loan contracting: evidence from corporate fraud," The European Journal of Finance, Taylor & Francis Journals, vol. 25(6), pages 550-567, April.
    • Handle: RePEc:taf:eurjfi:v:25:y:2019:i:6:p:550-567
    DOI: 10.1080/1351847X.2017.1328454
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    Citations

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    Cited by:

    1. Zhen Li & Yitong Sun & Jinhao Liu & Yi Li & Zhifang Zhou, 2024. "Corporate violations and bank debt cost: The insurance effect of corporate social responsibility," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 31(5), pages 4487-4503, September.
    2. Wang, Lu & Su, Zhong-qin & Fung, Hung-Gay & Jin, Hong-min & Xiao, Zuoping, 2021. "Do CEOs with academic experience add value to firms? Evidence on bank loans from Chinese firms," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    3. Bahoo, Salman, 2020. "Corruption in banks: A bibliometric review and agenda," Finance Research Letters, Elsevier, vol. 35(C).
    4. Chaudhry, Neeru & Kumari, Damini, 2024. "How do banks price carbon risk? Evidence from India," Pacific-Basin Finance Journal, Elsevier, vol. 84(C).
    5. Hongmin Jin & Lu Wang & Zuoping Xiao & Hung‐Gay Fung, 2023. "What firm risk factors drive bank loan pricing and other terms? Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 2985-3010, September.
    6. Dong Li, 2024. "RETRACTED ARTICLE: Sustainable Ecosystems and the Economics of State Ownership: A Three-Stage Structural Framework and Innovative Insights," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(3), pages 11090-11127, September.
    7. Li, Minghui & Song, Yiran & Duan, Yuejiao, 2025. "Social dishonesty and local public firm’s loan spreads: A Chinese bank loan analysis," Research in International Business and Finance, Elsevier, vol. 79(C).
    8. Zhang, Xiangguo & Zhao, Weiyi & Xie, Danxia, 2024. "Environmental regulation, academic top managers and green innovation: Evidence from China," Finance Research Letters, Elsevier, vol. 69(PB).

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