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The Impact of Bank Connection on Private Enterprises Financial Constraints

Author: GuoMuZuo
Tutor: MaJunLu
School: Nankai University
Course: Finance
Keywords: Bank Connection Private Enterprises Financing Constraints SocialCapital Information Asymmetry
CLC: F832.4
Type: PhD thesis
Year: 2013
Downloads: 111
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Abstract


Since the reform of state-owned enterprises, the proportion of private economy is gradually increasing in the national economy. But credit resources obtained by the private enterprise are quite limited. Small micro enterprise not only, but also to a varying extent in large and medium-sized private enterprises reflect the external capital demand, dependence on bank loans and the actual difficulties in financing. This dilemma is largely caused by China’s financial system arrangement, China’s financial system is given priority to with bank indirect financing, and slow development of capital market and direct financing channels, and crucially, the government have strong control on credit resources.From the perspective of industrialization, the institutional arrangement has its rationality and necessity. On the way of industrialization, the control of financial resources makes these countries to quickly catch up and achieve beyond. Of course, the disadvantages of the financial arrangements are bank preference of state-owned enterprises, credit discrimination on private businesses, and inhibition of the supply of credit to the private enterprise. Although represented by four large state-owned Banks reform of state-owned enterprises achieved partial success after2006, the domestic bank has improved marketing degree. But it is still not completely get rid of the intervention of local governments and the central bank lines of credit control, there are still many non-market factors in the decision-making process of bank credit.Under the current financial system, private enterprises are vulnerable to bank credit discrimination, and it is more difficult for them to get enough credit support from formal financing. In addition to this, financing costs of private enterprises are much higher, and they are often plagued by financing constraints. In this background, this article will explore other alternative mechanism to ease the credit discrimination caused by the nature of the ownership differences of private enterprises, and explore whether the bank connection can help private enterprises to get enough credit support from the formal channels, and to ease external financing constraint, strengthen for the private enterprise capital foundation. We use the national federation of industry and commerce survey statistical data of private enterprises. From four dimensions of income, size, profit and number of employees, we compare the listed private enterprises, listed small and medium-sized private enterprises and the private enterprises above designated size. With the listed private enterprises as an example, we use natural experiment that few researchers use in this field in China, with the new law regulations as an exogenous shock, comparative cash dividends differences before and after the new regulation between state-owned listed companies and private listed companies. We verify the financial constraints of private enterprises above designated size.Then we study the influence of bank interpersonal connection on private enterprises financing constraints from two perspectives of social capital and information. On the one hand, the emergence of informal system can make up for the gap and the insufficiency of formal system, and help reduce the degree of information asymmetry in credit market and relieve market friction. On the other hand, China’s traditional culture makes people attaches great importance to interpersonal relationships from daily life to all sorts of activities such as enterprise management, establishment and use of human feelings, face and relationship become an important capital in access to scarce resources. Using the data of small and medium-sized board listed private companies from their IPO prospectus; we do empirical research on the impact of bank interpersonal connection on private enterprises financing constraint. We find that bank interpersonal connection can significantly ease the private enterprise financing constraints, and political connection is the same. The Two types of connection have substitution effect. Liabilities and short-term bank borrowing of private enterprises with bank interpersonal connection are significantly higher than those without bank interpersonal connection. But there are no significant differences between the two types of private enterprises about long-term bank borrowing. In terms of financing costs, we do not find bank interpersonal connection could lower funding costs.Compared with bank interpersonal connection, bank equity connection is a kind of market behavior. As domestic bank reform continuously, internal governance and external legal system perfecting, the formal system will continue to work, and the trading behavior between banks and enterprises will be mainly based on the market. So we go on to discuss bank equity connection. Only company taking a stake in the bank is allowed at present stage in our country, so we analyze the impact of bank equity connection on private enterprises financing constraint.We construct a theoretical framework, and discuss the impact of taking equity stakes in banks on the inputs of preferences and financing costs of enterprises. We find that whether the bank’s credit decision-making is affected, the impact on the enterprise money demand is the same, and the capital price sensitivity is lower. Under any combination of the capital and the labor. Enterprises with bank equity connection will use more capital for the production, and preference capital intensive production mode. With the listed private enterprises as an example, we test the impact of bank equity connection on private enterprises financing constraint. We find that liabilities and bank borrowing of private enterprises with bank equity connection are significantly higher than those without bank equity connection, and the maturity structure of bank loan is markedly shortened, and financial risks are also increased, but not dramatically. In addition to that, due to domestic banking monopoly industries, there is a lucrative monopoly profits, so sharing the banking monopoly profits is one of the reason why private enterprises chose to hold bank equities at present stage.Although domestic commercial banking laws ban banks to hold non-financial enterprises’ equity, we still discuss this form of connection. We find that there are two channels for private enterprises with bank holding to get loans, one is direct channel, and the other is indirect channel. The former enhances the enterprise’s capital strength and increases the mortgage assets; it is the same to increase supervision capital. Meanwhile, after the success of the enterprise project, the bank income is increased, and the cost of supervision is made up, so the incentive mechanism of the bank is improved. The latter reduces the degree of information asymmetry, saves the cost of bank supervision activity, indirectly increased the potential for private enterprises to obtain credit.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Credit
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