How does bank ownership affect firm investment? Evidence from China

Hongjian Wang, Tianpei Luo, Gary Gang Tian*, Huanmin Yan

*Corresponding author for this work

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

This study examines how holding voting shares in banks can impact the improvement of firms’ investment efficiency in the Chinese capital market. We found that bank ownership improved firms’ investment efficiency by mitigating both overinvestment and underinvestment and by improving investment sensitivity to investment opportunities. We further found that alleviation of overinvestment in firms was driven by the enhancement of corporate governance (disclosure channels). The better corporate governance in bank holding firms reduced corporate cash holdings and controlling shareholder expropriations. Moreover, we found that this bank-firm connection reduced underinvestment by mitigating financial constraints (financing channels), through the raising of more bank loans and the reduction of the cash flow sensitivity of cash holdings. This connection also served as a buffer when bank lending is tightened. Finally, we found that bank ownership had a more pronounced impact on improving investment efficiency in non-SOEs, in firms located in provinces with low marketization, and in firms without institutional investors.

Original languageEnglish
Article number105741
Number of pages21
JournalJournal of Banking and Finance
Volume113
Early online date10 Jan 2020
DOIs
Publication statusPublished - Apr 2020

Keywords

  • Bank loan
  • Bank ownership
  • Chinese capital market
  • Corporate cash holding
  • Investment efficiency
  • Ownership structure

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