Leverage and investment under a state-owned bank lending environment : evidence from China

By Michael Firth, Chen Lin, Sonia M. L. Wong. 2008

321 citations recorded by the source corpus.

This study examines the relations between leverage and investment in China's listed firms, where corporate debt is principally provided by state-owned banks. We obtain three major findings. First, there is a negative relation between leverage and investment. Second, the negative relation between leverage and investment is weaker in firms with low growth opportunities and poor operating performance than in firms with high growth opportunities and good operating performance. Third, the negative relation between leverage and investment is weaker in firms with a higher level of state shareholding than in firms with a lower level of state shareholding. Overall, our results are consistent with the hypothesis that the state-owned banks in China impose fewer restrictions on the capital expenditures of low growth and poorly performing firms and also firms with greater state ownership. This creates an overinvestment bias in these firms.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/9433deea5e0c9a698d64143b5bc5c0a99d7d921f

How researchers see this paper

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In Accounting

1. Gary Gang Tian
2. D. Phung
3. Mengling Zhou
4. Xiaofei Pan
5. Chun Chang
6. Guanmin Liao
7. Xin Chen
8. Jianlei Han

In Finance

1. Gary Gang Tian
2. D. Phung
3. Mengling Zhou
4. Xiaofei Pan
5. Chun Chang
6. Guanmin Liao
7. Jianlei Han
8. Chunyan Liu

Citations in the corpus

• Corporate governance quality and financial leverage: Evidence from China (2020, background): “In addition, these firms have smaller restrictions on capital financing (Firth et al., 2008).”
• Controlling shareholder, expropriations and firm's leverage decision: Evidence from Chinese Non-tradable share reform (2012, unknown): “Moreover these studies indicate that China’s banking system is still dominated by state owned banks (Firth et al., 2008), who primarily issue loans to state owned enterprises (SOEs), and still discriminate against non-SOEs(Li et al.”
• Ownership Structure and Firm Performance: Evidence from Vietnamese Listed Firms (2016, background): “Firth et al. (2008) found that state ownership helps a firm to raise capital easily from bank loans.”
• Corporate governance and firm value during the global financial crisis: Evidence from China (2012, background): “investments (Firth et al., 2008).”
• The effect of government quality on corporate cash holdings (2014, unknown): “Firth et al. (2013) show that in China local governments that spend more on public administration tend to collect more fees from companies and spend less on social welfare and infrastructures.”
• Low-Carbon City Construction and Corporate Carbon Reduction Performance: Evidence From a Quasi-Natural Experiment in China (2021, background): “, 2019; Sadler, 2016), we take into account the firms’ financial characteristics that affect corporate climate-change strategies, such as firm size (Size), firm leverage (Leverage) (Firth et al., 2008), and firm profitability (ROA) (Clarkson et al.”
• To what extent did the economic stimulus package influence bank lending and corporate investment decisions? Evidence from China (2018, methodology): “In particular in regions with high corruption, SOE managers are likely to collude with managers of state-owned banks, which leads to the pursuit of empire-building and higher agency costs, due to insufficient monitoring by the state controlling shareholders (Firth et al., 2008).”
• Political connections and corporate investments: Evidence from the recent anti-corruption campaign in China (2017, methodology): “An alternative measure, the ratio of net capital expenditure (capital expenditure minus depreciation) to total assets (Firth et al., 2008), is considered for the robustness tests.”
• What are the Reliably Important Determinants of Capital Structure in China (2014, background): “Finally, Qian et al. (2009) and Li et al. (2009) both observed that state ownership is positively associated with book leverage, whereas Firth et al. (2008) reported a negative and significant correlation between state ownership and book leverage.”
• Economic Policy Uncertainty and Capital Structure Choice: Evidence from China (2015, background): “Though surprising, it is consistent with the empirical findings of Change et al. (2013) and Firth et al. (2008).”