Bank work experience versus political connections

which matters for bank loan financing?

Xiaofei Pan, Gary Gang Tian*

*Corresponding author for this work

Research output: Contribution to journalArticle

2 Citations (Scopus)

Abstract

This paper examines how bank lending decisions are affected either by executives’ connections with banks, through their former banking experience, or by their political connections with governments, using a sample of bank loans granted to Chinese listed non-state-owned enterprises (SOEs) from 2003 to 2010. We find that bank loans are more closely related to profitability for firms with bank connections, while firms’ political connections weaken this relationship. We further find that the influence of bank connections is more significant for firms from less supported industries or less developed regions. Furthermore, firms with bank connections are less likely to become financially distressed after the initiation of their bank loans and experience higher future stock returns, while firms with political connections experience the opposite outcome. Overall, our results indicate that in the context of a relationship-based economy like China, firms’ connections with banks create value by alleviating information asymmetry and improving banks’ lending decisions, while political connections result in capital misallocation and subsequent deterioration in performance.

Original languageEnglish
Pages (from-to)351-382
Number of pages32
JournalInternational Review of Finance
Volume20
Issue number2
Early online date28 Aug 2018
DOIs
Publication statusPublished - 1 Jun 2020

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