Year

2009

Degree Name

Master of Finance - Research

Department

School of Accounting and Finance

Abstract

This thesis examines the relationship between a firm’s credit risk and its loan characteristics in the context of Chinese listed firms. In particular, it focuses on the effect of China's new banking regulatory system on this relationship. It seeks to answer the following questions: Does a collateralized loan imply higher default risk? Is the credit risk markedly higher for borrowers with short-term loans than for borrowers with long-term loans? Is the credit risk more closely related to loan term and collateral after the implementation of the new banking regulatory system? To answer the above questions, quantitative methods will be adopted. A modified version of the logit models used in Estrella et al. (1998) is applied in this thesis. We regress dependent variables of credit risk to a firm’s financial-ratio variable, macro-economic variables and loan-characteristic variables. The data set of this study is all firms listed on the Shanghai stock exchange. To capture the effect of the new banking regulatory system, we has selected the panel data from 2002-2007 and introduced a dummy variable that represents the enforcement of the new law into the model as an explanatory variable. After controlling for other variables, this research finds that the credit risk of a firm is positively related to the proportion of collateralized loans, and negatively related to the proportion of long-term loans. It also found that the firm’s proportion of long-term loans and the proportion of collateralized loans are increasingly and significantly related to the firm’s credit risk as a consequence of the implementation of the new law. This research suggests that the new banking regulatory system is changing the way that banks design loan contracts. Despite some limitations, the findings in this research make a significant contribution to the research in this area. It adds empirical evidence to the current literature about the relationship between a firm’s loan characteristics and credit risk as a consequence of the implementation of China’s new banking regulatory law.

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