Government intervention and firm long-term bank debt: evidence from China
| DOI | https://doi.org/10.1108/JABS-03-2016-0040 |
| Pages | 137-150 |
| Published date | 08 May 2018 |
| Date | 08 May 2018 |
| Author | Fei Liu,Chao Bian,Christopher Gan |
| Subject Matter | Strategy,International business |
Government intervention and firm long-
term bank debt: evidence from China
Fei Liu, Chao Bian and Christopher Gan
Abstract
Purpose –This paper aims to examine whether government intervention acts as a substitution
mechanism for laws and institutions in affecting firms’ long-term debt financing decision and the
moderating effect of firm ownership on the relationship between law and finance in Chinese capital
market.
Design/methodology/approach –This study uses ordinary least squares with standard errors
clustered at the firm levelin the regressions. To address the potential endogeneityproblem, the authors
also use the systemgeneralized method of moments in their estimation.
Findings –The results show that both long-termbank debt and long-term bank debt maturity structure
ratios are positively related to government intervention. The resultsalso reveal that with improvement in
the legal environment, public non-state-owned firms have more access to long-term bank debt in the
regionswhere the level of government intervention is low.
Research limitations/implications –Government interventionappears to replace laws and institutions
in influencingthe allocation of financial resources in China.
Originality/value –The findingsuggests the necessity of increasing theprotection of both creditors and
investors, and shows the importance of a free and independent judiciary system in allocating funds to
private firms. The results also imply that the non-state-owned Chinese firms also benefit from the
improvedlaws and institutions.
Keywords Law and finance, Long-term debt, Government intervention, Firm ownership
Paper type Research paper
1. Introduction
Despite the large number of studies on the relationship between debt maturity and
institutional environment (Demirgu
¨c¸-Kunt and Maksimovic, 1998;Fan et al.,2012;Qian and
Strahan, 2007), limited attention has been paid to the relationship between debt maturity
and government intervention. Thus, this study aims to fill this gap by testing how
government interventionaffects the long-term bank debt of Chinese public firms.
This study is based on a “substitution hypothesis”in which government intervention may act
as a substitute mechanism for the legal regime in helping firms to access to long-term
funds. It is very likely that the central government in China have an incentive to intervene in
the firm’s corporate policies (Fan etal., 2012). First, the government intervenes in the public
firms’ capital structure choice through majority ownership in public state-owned enterprises
(SOEs) (Nakamura and Fruin, 2012). Althoughthe private sector in China has been growing
fast (Allen et al., 2005), SOEs continue to dominate the Chinese share markets. For
instance, Chen et al. (2011) also documented that 75 per cent of their sample firms are
SOEs and 33 per cent listed SOEs have a chief executive officer (CEO) or a chairman who
is a current or former government official. When non-SOEs request for long-termbank debt,
Chinese state-owned banks request more restrictive loan-granting criteria (Xu et al., 2011);
on the other hand, when Chinese SOEs need long-term loans, state-owned banks require
Fei Liu is based at School of
Economics, Henan
University, Henan, China.
Chao Bian is based at
Lincoln University, Lincoln,
New Zealand.
Christopher Gan is
Associate Professor at
Department of Accounting,
Economics and Finance,
Lincoln University,
Christchurch,
New Zealand.
Received 11 March 2016
Revised 7 September 2016
Accepted 30 October 2016
This work was supported by the
2014 Ministry of Education
(China PR) Humanities and
Social Sciences Research
Project under Grant
(14YJCZH094).
DOI10.1108/JABS-03-2016-0040 VOL. 12 NO. 2 2018, pp. 137-150, ©Emerald Publishing Limited, ISSN 1558-7894 jJOURNAL OF ASIA BUSINESS STUDIES jPAGE 137
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