Doctor of Philosophy
School of Accounting, Economics and Finance
An, Can, Ownership structure, corporate governance, and collateral requirements: evidence from China's listed firms, Doctor of Philosophy thesis, School of Accounting, Economics and Finance, University of Wollongong, 2014. http://ro.uow.edu.au/theses/4047
Since the 2007 financial crisis the use of collateral has again come back into the focus of academics and practitioners. However, the existing literature on the determinants of collateral has concentrated mostly on developed markets, especially the U.S. and the U.K., although collateral is even more important due to the opaque information that exists in developing markets. This thesis conducted useful tests of whether the theories that have been established and applied to explain the determinants of collateral in developed markets are applicable to the world’s largest emerging market, China. Since China introduced economic reforms in the late 1970s, it has been growing at high speed, with the banking sector being the primary source of finance for its growing economy (Bailey et al., 2011). With this pronounced economic expansion and increasing competition for funds, the investigation of collateral requirements in bank loans has been an extrusive issue in China.
Firstly, this research examined the effect of ownership structure on collateral requirements using a sample of China’s listed firms. I found that compared to non-stateowned enterprises (non-SOEs), state-owned enterprises (SOEs) were less likely to be required to pledge collateral. The empirical results also showed that banks were more willing to offer unsecured loans to companies with more foreign ownership or with more bank loans guaranteed by third parties, and the aforementioned effect of state ownership on reducing collateral requirements became weaker in those companies. This research also found that the aforementioned effect of state ownership on reducing collateral requirements became more pronounced for firms operating in regions with more government intervention.
Secondly, this research examined the effect of ownership structure on the lending relationships in China’s listed firms. The findings indicated that SOEs were more likely to receive bank loans from state-owned banks than non-SOEs. The empirical results also showed that firms with more foreign ownership were more likely to receive bank loans from foreign banks. There was no significant difference between SOEs and non- SOEs in the probability of obtaining loans from joint stock commercial banks, while firms with more foreign ownership were more likely to obtain loans from this type of banks. Moreover, both SOEs and firms with more foreign ownership were more likely to maintain multiple banking relationships. It was also found that firms that operated in regions with a better institutional environment had more concentrated ownership in bank loans rather than multiple banking relationships. My findings also implied that joint stock commercial banks have a comparative advantage in processing private information and delivering relationship lending rather than collateral based lending, while concentrated banking relationships were also helpful for gathering information and reducing collateral requirements. Moreover, the role of concentrated banking relationships in reducing collateral requirements was greater for firms that borrow from joint equity commercial banks.
Finally, this research examined the effect of internal and external corporate governance mechanisms on collateral requirements from a tunnelling perspective. Using a sample of China’s listed firms, I found that better-governed firms were less likely to be expropriated by their controlling shareholder and therefore had lower collateral requirements. In particular, large owners other than the largest one could form coalitions and challenge the opportunistic dominant shareholder and the collateral requirements were accordingly lower, and the effect of other large shareholders was more significant in non-SOEs. In terms of the board of directors and the supervisory board, the collateral requirements were lower for firms with a smaller board of directors, a larger fraction of independent directors, where the chairman and CEO positions were separate, and where there was a larger supervisory board. Moreover, the effects of these board characteristics were more significant for SOEs than non-SOEs. I also found evidence that a better institutional environment within China helped to reduce collateral requirements and the role of institutions were more significant for non-SOEs. Finally, I found that employing professional experts on the supervisory board showed the benefit of reducing the collateral requirements for both SOEs and non-SOEs, and the role of professional supervisors was more significant in more developed regions than in less developed regions.
In summary, this thesis contributes to the literature of collateral based lending, banking relationship, and corporate governance, and provides evidence that corporatisation and privatisation exercised significant effects on the level of collateral requirements when China’s listed firms were used as an example. Specifically, ownership structure can impact on the collateral requirements and also on the banking relationships. The effect of corporate governance on collateral requirements varied across the ownership types.