Lending to Private Firms: Evidence from China on the Role of Firm Openness and Bribery

Abstract

This paper investigates the effects of firm openness and bribery on bank lending decisions. Using World Bank data covering 1869 private firms, we find evidence that paying bribes helps firms obtain bank credit in China. But after adding firm openness into the analysis, the significance of the effect of bribery on banking finance disappears. Instead, we find that banks in China prefer to allocate loans to firms with a higher level of openness. This finding holds true only for large firms, manufacturing firms, and firms located in regions with good banking development. We also find that private firms with greater government assistance are more likely to obtain bank loans, and more credit overall.Abstract: This paper investigates the effects of firm openness and bribery on bank lending decisions. Using World Bank data covering 1869 private firms, we find evidence that paying bribes helps firms obtain bank credit in China. But after adding firm openness into the analysis, the significance of the effect of bribery on banking finance disappears. Instead, we find that banks in China prefer to allocate loans to firms with a higher level of openness. This finding holds true only for large firms, manufacturing firms, and firms located in regions with good banking development. We also find that private firms with greater government assistance are more likely to obtain bank loans, and more credit overall.

The impact of corruption on firms’ access to bank loans: evidence from China

“…State ownership can provide an implicit guarantee for firms' debt; therefore, firms with state ownership have a lower probability of bankruptcy than non-SOEs (Borisova et al, 2015). Private enterprises that receive more government assistance are more likely to receive bank loans (Ruan et al, 2018). Hence, firms try to find effective ways to obtain funds from financial institutions and alleviate financing constraints, such as obtaining government guarantees and bribing officials.…”

“…A possible explanation is that China lacks a sound financial system and legal system, and that government intervention reduces the efficiency of resource allocation in the financial market. However, some studies argue that bribery has nothing to do with firms' bank financing channel and bank financing scale (Ruan et al, 2018;Tian et al, 2017).…”

Paradox of White Collar Crime and Fraud in Banking: Critical Analysis of Agency Theory and Gone Theory

“…The thing that needs to be observed is that contextual agency theory is not merely a relationship of authority cooperation between the principal and the agent, but rather the goal of getting the maximum profit (Shonhadji & Maulidi, 2020). This can be indicated by the principal who is willing to spend a significant amount of money just to carry out control and supervision (Hayashi, 2019;Ruan, Xiang, & Ma, 2018).…”