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Published in: Review of Quantitative Finance and Accounting 4/2023

17-02-2023 | Original Research

When in Rome, do as the Romans do: loan syndication in a state-dominated market

Authors: Luqiao Zhang, Biao Mi, Yun Shen, Liang Han

Published in: Review of Quantitative Finance and Accounting | Issue 4/2023

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Abstract

In the developed markets, good earnings quality could effectively reduce information asymmetries in loan syndication. However, our results shows that earnings quality plays a limited role in loan syndications in a market where the state has dominant power. Examining a sample of syndicated loans to Chinese corporate borrowers, we find that state ownership overrides the signaling role of earnings quality in alleviating the problems of adverse selection and moral hazard, as it provides an implicit guarantee of the loan repayment. Nonetheless, interestingly, firms with better earnings quality, regardless of their state ownership, are rewarded with more favorable loan price. Such an overriding role of state-ownership over syndicated loan contracting prevails even with the presence of foreign lender participation, which suggests that foreign banks seem to have followed the conventional wisdom that ‘when in Rome, do as the Romans do’.

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Appendix
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Footnotes
1
The total volume of syndicated loans achieved an amount of USD$4.7 trillion in 2015 globally, compared with USD$3.02 trillion in international bond markets for non-financial companies (see Thomson Global Syndicated Loans Review and Bank for International Settlements for more details). The syndicated loan market in China had a total amount of USD$923 billion in first half of 2016, accounting for 11.35% of total loans, compared to 1.72% in 2006 (CBS 2016).
 
2
Pessarossi et al. (2012) documented 65% foreign lender participation in China and we find that 62% of the loan facilities are led by all foreign lenders and 75% of the lead lenders are foreign banks.
 
4
The size of this sample is considerably larger than recent studies on Chinese syndicated loans such as Caporale et al. (2018) with 139 observations, Pessarossi et al. (2012) with 92 observations and Korkeamaki et al. (2014) with 206 observations.
 
5
We also convert firm asset value into U.S. dollars and if the value is in other currencies, we use exchange rate on the date of financial statement becoming available.
 
6
Debt repayment is the most frequently quoted loan purpose and accounts for over 20% of our total samples. Other purposes of loans include capital expenditure, corporate takeover for instance.
 
7
We do not test the effects of financial reporting quality and state-ownership on other non-pricing terms, such as amount, collateral and covenants due to lack of data from Dealscan and Bloomberg.
 
8
We use the variable All Foreign to group loan facilities into foreign group and domestic group. If all lead arrangers are foreign lenders, they would have more severe asymmetric information problem than domestic lenders.
 
9
In addition, results reported in Table 5 also show that collateral reduces foreign lender participation, consistent with the empirical evidence on the positive relationship between the presence of collateral and corporate default risks (Booth and Booth 2006) and the findings in China where low-risk borrowers, such as SOEs, are less inclined to provide loan collateral (An et al. 2014). We thank an anonymous referee for raising this point.
 
10
We randomly reorder abnormal accruals over years for each sample borrower. If there exists an omitted variable at firm level which affects both abnormal accruals and syndicated loan, the coefficient of fake_accrual would be statistically significant.
 
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Metadata
Title
When in Rome, do as the Romans do: loan syndication in a state-dominated market
Authors
Luqiao Zhang
Biao Mi
Yun Shen
Liang Han
Publication date
17-02-2023
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting / Issue 4/2023
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-023-01137-4

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