3.5 Results
3.5.1 Bank ownership reform and corporate credit access
While the bank ownership reform may have made SOBs more stringent in the bank lend-ing process to prevent the acquisition of potentially nonperformlend-ing loans (NPLs), it is unclear whether it may have caused a noticeable decline in overall credit supply to the corporate sector. Alternatively, the bank ownership reform might also have increased total bank lending if banks had more available capital to lend due to a decline in funding to specific industries favored by governments. Columns (1)-(3) in table 3.2 report the results on the average effect of the bank ownership change on listed companies’ credit access based on equation 3.5. Column (1) reveals that listed companies in cities with greater exposure to the three SOBs saw a negligible decline in their credit access after the bank ownership reform, as the coefficient ofBig Three Exposurec,t is statistically
non-significant and has a small economic magnitude. Column (2) includes a set of one-year lagged firm-level variables to control for a firm’s future credit demand, and the result changes modestly. Then, Column (3) adds industry-year fixed effects to eliminate any industry-specific credit (demand) shocks,4 and the coefficient of Big Three Exposurec,t is still statistically nonsignificant.
The results suggest that the bank ownership reform did not change the SOBs’ total lending. If this is the case, it is natural to conjecture that the banks changed their asset portfolio via credit reallocation, i.e., reduced (increased) lending to riskier (less risky) corporate borrowers, to improve the bank’s overall asset quality. We thus use equation 3.5 to test whether the bank ownership reform led firms with higher profitability, lower debt, or larger asset sizes to acquire more credit, as all these firm features may reflect lower default risk.
Column (4) reveals that the bank ownership change did not increase bank lending to more profitable firms, as the coefficient of Big Three Exposurec,t ×ROAi,t−1 is positive but statistically nonsignificant. However, column (5) shows that a higher debt ratio is associated with a prominent decline in credit access due to the bank ownership reform, as the coefficient of Big Three Exposurec,t×Debt ratioi,t−1 is negative at −0.162 and sta-tistically significant at the 5% level. The difference in the ratio of loan funding to initial assets between firms at the 90thpercentile and firms at the 10thpercentile of the debt ratio increases by approximately2.9percentage points in cities at the 90th percentile relative to cities at the 10thpercentile of exposure to the three SOBs after the bank ownership reform
5; this increase represents 10% of the average of this ratio in the full sample. Column (6) does not support the hypothesis that the bank ownership reform increased SOBs’ lending to larger firms, as the coefficient of Big Three Exposurec,t×lnAssetsi,t−1 is positive but nonsignificant.
Different firm characteristics might be correlated and may result in false positives in the detection of the effects; hence, column (6) pools three firm characteristics together in the same regression, with the same set of firm-level controls as in column (2). The conclusion does not change—only the firm debt ratio matters for corporate credit access, and the magnitude of the coefficient even increases by41% [= 0.229/0.162−1]. Column (7) again adds industry-year fixed effects, and the result is similar. The overall results imply that the firm debt level rather than the other firm characteristics became more important in SOB loan officers’ decision-making after the bank ownership reform, consistent with our claim that the ownership structure reform of the SOBs reduced bank lending to riskier corporate borrowers.
Further, we decompose the firm debt ratio to explore which liability component on firms’ balance sheets contributes to the observed bank reform effect. There are four major components: outstanding loans, outstanding bonds, payable debt (notes payable and accounts payable), and the remaining liabilities. Explicitly, loan debt accounts for 44.6%, bond debt accounts for0.4%, payable debt accounts for25.7%, and the remaining components account for 29.3% of total liabilities.
Column (1) of table 3.3 shows that firms with a higher ratio of outstanding loans to assets (loan debti,t−1/assetsi,t−1) experienced a significant decline in received loan funding
4The industry classification of the listed companies follows the Global Industry Classification Standard (GICS).
5The difference between the 90thpercentile and the 10thof leverage is 0.47 [=0.70-0.23], the difference between the 90th percentile and the 10th of city-level exposure is 0.39 [=0.65-0.26], so the quantitative effect is -0.029 [=-0.16×0.47×0.39].
Table 3.2: Bank ownership change and corporate credit access
(1) (2) (3) (4) (5) (6) (7) (8)
Dependent Variable loan fundingi,t/assetsi,t−1
Big Three Exposurec,t −0.070 −0.080 −0.066 −0.072 0.053 −0.820 −0.555 −0.403 (0.058) (0.057) (0.056) (0.056) (0.071) (0.585) (0.552) (0.571)
Big Three Exposurec,t× ROAi,t−1 0.266 −0.216 −0.209
(0.214) (0.279) (0.268)
Big Three Exposurec,t× Debt ratioi,t−1 −0.162∗∗ −0.229∗∗ −0.227∗∗
(0.077) (0.092) (0.089)
Big Three Exposurec,t×lnAssetsi,t−1 0.034 0.028 0.021
(0.028) (0.026) (0.027)
Big Three Sharec,1999× ROAi,t−1 0.289 0.128 0.133
(0.274) (0.261) (0.266)
ROAi,t−1×T{t >2003} 0.091 0.164 0.151
(0.098) (0.124) (0.120)
Big Three Sharec,1999× Debt ratioi,t−1 −0.202 −0.143 −0.151
(0.176) (0.165) (0.162)
Debt ratioi,t−1×T{t >2003} −0.075∗∗ −0.068∗ −0.061
(0.038) (0.041) (0.040)
Big Three Sharec,1999×lnAssetsi,t−1 0.089 0.073 0.104
(0.075) (0.076) (0.083)
Industry×Year fixed effects Y Y
Observations 7,733 7,733 7,733 7,733 7,733 7,733 7,733 7,733
R-squared 0.01 0.03 0.05 0.02 0.02 0.01 0.04 0.06
Notes: This table explores the effect of the ownership reform of three of China’s largest SOBs (Bank of China, China Construction Bank, and Industrial and Commercial Bank of China) on listed companies’ credit access. The dependent variable is the ratio of loan funding to initial assets (loan fundingi,t/assetsi,t−1). The time-variant city-level exposure (Big Three Exposurec,t) is measured by the sum of each SOB’s loan share in 1999 interacted with the indicator for the postreform period.
Big Three Sharec,1999 is the sum of the three SOBs’ loan shares in 1999. Firm-type categories include firm profitability, measured by the return on assets (ROAi,t−1); firm debt level, measured by the ratio of total liabilities to total assets (Debt ratioi,t−1); and firm size, measured by the (log) book value of assets (lnAssetsi,t−1). Robust standard errors (clustered at the city level) are in parentheses. We use ***, **, and * to denote statistical significance at the 1%, 5%, and 10% levels, respectively.
due to the bank ownership reform. In contrast, column (2) reveals that the bank ownership reform did not reduce bank lending to firms with a higher ratio of bond debt to assets (bondi,t−1/assetsi,t−1), and the coefficient even becomes positive, albeit nonsignificant.
This might be explained by the possibility that bond debt is a signal for low default risk, as only a few successful companies can issue bonds. However, this result does not have a large economic effect due to the low share of such debt. Columns (3)-(4) further show that the bank ownership reform did not affect the credit access of listed companies with different levels of payable debt and other liabilities, although the sum of these two types of liabilities is even larger than the amount of outstanding loans.
Table 3.3: Bank ownership change, liability components and corporate credit access
(1) (2) (3) (4) (5) (6)
Dependent Variable loan fundingi,t/assetsi,t−1
Big Three exposurec,t 0.082 −0.082 −0.045 −0.057 0.113 0.129∗ (0.068) (0.057) (0.067) (0.056) (0.079) (0.072)
Big Three exposurec,t −0.573∗∗∗ −0.597∗∗∗ −0.658∗∗∗
×loansi,t−1/assetsi,t−1 (0.159) (0.159) (0.149)
Big Three exposurec,t 1.105 0.933 1.046
×bondsi,t−1/assetsi,t−1 (1.411) (1.321) (1.258)
Big Three exposurec,t −0.212 −0.288 −0.229
×payable debti,t−1/assetsi,t−1 (0.231) (0.219) (0.215)
Big Three exposurec,t −0.030 0.115 0.132∗
×other liabilityi,t−1/assetsi,t−1 (0.080) (0.077) (0.077)
R-squared 0.05 0.03 0.03 0.04 0.06 0.07
Notes: This table explores which debt component explains why more-indebted firms received less credit after the ownership reform of three of China’s largest SOBs (Bank of China, China Construction Bank, and Industrial and Commercial Bank of China). The dependent variable is the ratio of loan funding to initial assets (loan fundingi,t/assetsi,t−1). The time-variant city-level exposure (Big Three Exposurec,t) is measured by the sum of each SOB’s loan share in 1999 interacted with the indicator for the postre-form period. All columns include the control variables from table 3.2 column (2), and all other terms (Firm typei,t−1,Firm typei,t−1×T{year > 2003}and Firm typei,t−1×Big Three Sharec,1999) are as in equation3.5. Robust standard errors (clustered at the city level) are in parentheses. We use ***, **, and
* to denote statistical significance at the 1%, 5%, and 10% levels, respectively.
Column (5) pools all liability components into the same regression as a robustness check and shows that only the coefficient ofBig Three Exposurec,t×loan debti,t−1/assetsi,t−1 is negative and statistically significant. Including industry-year fixed effects in column (6) does not change the result. Therefore, the overall results suggest that the bank ownership change caused outstanding loans rather than other liability components to become more central to the rating of credit risk in the bank lending process.