How Does Greater Bank Competition Affect Borrower Screening? Evidence from a Natural Experiment Based on China's WTO Entry

56 Pages Posted: 17 Aug 2018 Last revised: 18 Nov 2020

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Jiaqi Qin

Nankai University-Business School

Yan Sun

Saint Louis University

Qianqian Yu

Lehigh University

Xiang Zheng

Boston College - Department of Finance

Date Written: November 17, 2020

Abstract

We analyze the relationship between greater bank competition and the screening of potential borrowers. Using a large sample of Chinese private firms and China's entry into the WTO as a natural experiment, we find the following. First, the sensitivity of bank credit to prior borrowing-firm performance increases after China's WTO entry. This sensitivity increase is greater in more bank-dependent industries and smaller in Chinese regions with greater financial sector development. Second, the increase in the sensitivity of bank credit to firm performance is much greater for state-owned firms compared to private firms. Third, the effect of bank credit on subsequent firm productivity and performance is greater for loans given after China's WTO entry compared to those given prior to WTO entry. Overall, the results of our empirical analysis suggest that the stringency of bank screening of borrowers in China increased with greater banking sector competition.

Keywords: Bank Competition, Borrower Screening; Financial Sector Development; State-owned Firms

JEL Classification: G21, G32

Suggested Citation

Chemmanur, Thomas J. and Qin, Jiaqi and Sun, Yan and Yu, Qianqian and Zheng, Xiang, How Does Greater Bank Competition Affect Borrower Screening? Evidence from a Natural Experiment Based on China's WTO Entry (November 17, 2020). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3223534 or http://dx.doi.org/10.2139/ssrn.3223534

Thomas J. Chemmanur (Contact Author)

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Jiaqi Qin

Nankai University-Business School ( email )

No. 121, Baidi Road, Nankai District
Tianjin, 300071
China

Yan Sun

Saint Louis University ( email )

3674 Lindell Blvd
St. Louis, MO 63108-3397
United States

Qianqian Yu

Lehigh University ( email )

621 Taylor Street
Bethlehem, PA 18015
United States

Xiang Zheng

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

HOME PAGE: http://www.xiangzheng.info

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