Does Banks’ Dual Holding Affect Bank Lending and Firm Investment Decisions? Evidence from China

41 Pages Posted: 17 Feb 2014 Last revised: 4 Sep 2014

See all articles by Xiaofei Pan

Xiaofei Pan

University of Wollongong

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies; Macquarie University, Macquarie Business School

Date Written: February 14, 2014

Abstract

This study investigates the effect of banks' dual holding on bank lending and firms' investment decisions using a sample of listed firms in China. We find that dual holding leads to easier access to bank loans, a result that is more pronounced for non-state-owned enterprises (non-SOEs) than SOEs. We also find that dual holding distorts banks' lending decisions and harms the investment efficiency for SOEs, while resulting in optimal lending decisions and enhanced investment efficiency for non-SOEs. For non-SOEs, further analysis suggests that optimal lending decisions and efficient investment can be achieved for firms with higher ownership concentration, and firms in which the family and foreign investors are the controlling shareholders. We argue that, in emerging markets, whether a bank plays a monitoring role by directly holding the debt and equity claims of companies relies heavily on whether the potential collusion between firm executives and bank managers can be averted, which in turn is determined by the firms’ governance framework and ownership structure.

Keywords: Bank dual holding, Lending decision, Investment efficiency, SOEs and non-SOEs, Conflicts of interest, China

JEL Classification: G31, G34, G21

Suggested Citation

Pan, Xiaofei and Tian, Gary Gang, Does Banks’ Dual Holding Affect Bank Lending and Firm Investment Decisions? Evidence from China (February 14, 2014). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2396397 or http://dx.doi.org/10.2139/ssrn.2396397

Xiaofei Pan

University of Wollongong ( email )

Northfields Avenue
Wollongong, New South Wales 2522
Australia

Gary Gang Tian (Contact Author)

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Room 513, Building E4A
North Ryde, NSW, 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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