Debt Financing, Soft Budget Constraints, and Government Ownership: Evidence from China

21 Pages Posted: 9 Jul 2007

See all articles by Lihui Tian

Lihui Tian

Nankai University; University of London; Peking University - Department of Finance

Saul Estrin

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Abstract

Debt financing is expected to improve the quality of corporate governance, but we find, using a large sample of public listed companies (PLCs) from China, that an increase in bank loans increases the size of managerial perks and free cash flows and decreases corporate efficiency. We find that bank lending facilitates managerial exploitation of corporate wealth in government-controlled firms, but constrains managerial agency costs in firms controlled by private owners. We argue that the failure of corporate governance may derive from the shared government ownership of lenders and borrowers, which nurtures soft budget constraints.

Suggested Citation

Tian, George Lihui and Estrin, Saul, Debt Financing, Soft Budget Constraints, and Government Ownership: Evidence from China. Economics of Transition, Vol. 15, No. 3, pp. 461-481, July 2007, Available at SSRN: https://ssrn.com/abstract=998362 or http://dx.doi.org/10.1111/j.1468-0351.2007.00292.x

George Lihui Tian (Contact Author)

Nankai University ( email )

Tianjin, 300071
China

University of London ( email )

Exhibition Road
London, WC1E 7HU
United Kingdom

Peking University - Department of Finance ( email )

No. 38 Xueyuan Road
Haidian District
Beijing, Beijing 100871
China
+86 10 6275 7900 (Phone)
+86 10 6275 14763 (Fax)

Saul Estrin

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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