Year
2022
Degree Name
Doctor of Philosophy
Department
School of Business
Abstract
While the Chinese Government has played an increasingly important role in bank operations, via state ownership and regulatory monitoring, relatively little is known of the real impact of government on banking systems, especially in emerging markets. This thesis examines government involvement in China’s banking industry from three perspectives. First, it investigates the effect of government ownership on accounting practices in banks, with a particular focus on earnings management. Next, the thesis investigates how the geographic distance between banks and their regulator affects risk-taking in banks and the subsequent spillover to the corporate sector. Finally, the role of banks in underwriting bonds issued by local governments is examined.
With respect to the effect of government ownership on earnings management in banks, the results show that government-owned banks conduct more accruals-based earnings management, specifically to reduce income. This effect is stronger in banks facing less intervention from controlling shareholders, those located in provinces with relatively advanced institutional development, and in city commercial banks. There is no evidence that government ownership influences real earnings management in banks. Regarding government involvement as the banking regulator, I find that banks monitored by a distant regulator take on additional risk in terms of lower capital ratios and more non-performing loans. These results are driven by non-government-owned banks and banks located in provinces with low levels of corruption. Firm-level analysis shows that firms borrowing from banks that are further away from regulators also take on more risk. In relation to the role of banks as underwriters of bonds issued by local governments, this thesis finds that when local governments encounter tougher financing regulation, they tend to disconnect from Central Government-Controlled Banks (CGCB) by changing from CGCB to non-CGCB underwriters. The disconnection effect does not occur in bonds with AAA credit ratings or those with higher-than-average credit spreads. The bank-level evidence shows that more participation in local-government bond underwriting is associated with more shadow banking activities for non-CGCB banks.
Overall, government involvement brings several unintended consequences in terms of earnings management and ineffective regulation. It creates an inadvertent conflict of interest between bank managers and government officials, resulting in managers in government-owned banks reducing earnings to alleviate their government-imposed social and political responsibilities. The Government’s effectiveness as a regulator is affected by geographic distance. In terms of involvement as bank clients, local governments tend to disconnect from banks controlled by the Central Government to evade financing regulations.
Recommended Citation
Pan, Nengqi, What happens in banking and financing when the government is involved, Doctor of Philosophy thesis, School of Business, University of Wollongong, 2022. https://ro.uow.edu.au/theses1/1610
FoR codes (2008)
1501 ACCOUNTING, AUDITING AND ACCOUNTABILITY, 1502 BANKING, FINANCE AND INVESTMENT, 1503 BUSINESS AND MANAGEMENT
Unless otherwise indicated, the views expressed in this thesis are those of the author and do not necessarily represent the views of the University of Wollongong.