Inside the black box Bank credit allocation in Chinas.pdf

Title Inside the black box: Bank credit allocation in Chinas private sector Author(s) Firth, M; Lin, C; Liu, P; Wong, SML Citation Journal of Banking and Finance, 2009, v. 33 n. 6, p. 1144-1155 Issued Date 2009 URL /10722/192329 Rights Creative Commons: Attribution 3.0 Hong Kong License Inside the Black Box: Bank Credit Allocation in China’s Private Sector☆ a* b a a Michael Firth , Chen Lin , Ping Liu and Sonia M.L. Wong a Department of Finance and Insurance, Lingnan University, Hong Kong b Department of Economics and Finance, City University of Hong Kong November, 2008 Abstract Allen, Qian and Qian (2005, Journal of Financial Economics) explores the role of alternative financing channels (e.g., trade credits and private credit agencies) and governance mechanisms, such as those based on reputation and relationship, in explaining the growth of the private sector in China. We complement their study by examining how the Chinese state-owned banks allocate loans to private firms. We find that the banks extend loans to financially healthier and better-governed firms, which implies that the banks use commercial judgments in this segment of the market and are behaving more like their western counterparts. On top of this, however, we find that having a state minority ownership helps firms obtain bank loans, which suggest that political connections still play a role in gaining access to bank finance . In addition, we find that commercial judgments are importa