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Bank financing and corporate governance

Author

Listed:
  • Qian, Meijun
  • Yeung, Bernard Y.
Abstract
Extant literature suggests that bank monitoring improves corporate governance. This paper demonstrates that inefficiency in banking can also significantly reduce the equity capital markets' disciplinary power. Specifically, we show that in an environment in which the banking system is dominated by inefficient state-owned banks, controlling shareholders' tunneling activity is positively associated with firms' bank loan access. This relation is particularly strong in firms with high borrowing capacity, as measured by tangibility, and in regions where the banking industry is severely inefficient. As firms with high tunneling can continue to receive new loans with interest cost compatible to others, equity capital market disciplinary forces do not apply to them. Indeed, we further show that through tunneling, bank financing is negatively associated with future firm performance. These results suggest that, for an economy to develop mature capital markets, it is imperative to improve banking efficiency because its inefficiency dilutes the monitoring role of the market.

Suggested Citation

  • Qian, Meijun & Yeung, Bernard Y., 2015. "Bank financing and corporate governance," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 258-270.
    • Handle: RePEc:eee:corfin:v:32:y:2015:i:c:p:258-270
    DOI: 10.1016/j.jcorpfin.2014.10.006
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    References listed on IDEAS

    as
    1. Simon Johnson, 2000. "Tunneling," American Economic Review, American Economic Association, vol. 90(2), pages 22-27, May.
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    More about this item

    Keywords

    Bank financing; Corporate governance; Tunneling; Loan pricing;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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