Information contents of collateral under heterogeneous borrower qualities on the bank loans market in China

We analyze the risk of default and provision of collateral for bank loans made to firms of varied credit qualities using a unique dataset obtained from a major state-owned commercial bank in China. Both high and low quality borrowers provide collateral more often than medium quality debtors do. Using models that explicitly incorporate heterogeneous borrower qualities, we find a positive relation between collateralization and risk of default for loans issued to debtors with low credit ratings. In contrast, collateral provided by debtors with high credit ratings is negatively associated with the risk of default. These results suggest that low quality borrowers may be required to provide collateral at the bank's request to mitigate moral hazard problem. On the other hand, high quality borrowers may provide collateral willingly to signal quality in order to mitigate adverse selection problem when competing for getting access to bank loans. Our findings shed new lights on different information contents of collateral on the bank loans market of China, and have important implications for banks in screening, contracting and monitoring the risk of commercial loans for clients with diverse credit qualities.     

Japanese Banks’ monitoring activities and the performance of borrower firms: 1981–1996

We construct an index measure that quantitatively describes the monitoring activities of Japanese banks. Using micro data on Japanese banks and borrower firms, we examine the effects of bank monitoring on the profitability of borrower firms. We find significant positive effects in the periods 1986–1991 and 1992–1996, although there is no significant effect in the period 1981–1985. We also examine how banks’ monitoring affects borrowers. The results show that the positive effects of banks’ monitoring on borrowers’ profitability are mostly caused by screening effects, not performance-improving effects.

信息不对称、抵押物与商业银行消费贷款经营行为——基于商业银行微观业务数据的经验分析

本文基于国内某银行消费贷款业务数据,实证研究了信息不对称条件下抵押物对商业银行消费贷款经营行为的影响。结果表明：（1）抵押物能够显著影响商业银行消费贷款配给行为,提供抵押物的借款人获得的借款额度明显较高,且抵押物配给效果受信息不对称程度影响明显;（2）抵押物与消费贷款违约风险呈现显著的负相关关系,抵押物作用机制中的“客户选择”效应占主导地位;（3）抵押物决定与借款人事前风险评估无明显关联,但与借款人抵押物可获得性高度相关,表明银行业务经营中存在一定程度的抵押物依赖现象。     

Common Auditors and Private Bank Loans*

We show that when banks and borrowers share the same audit firm, borrowers receive lower interest rates, after controlling for potentially confounding director connectedness. The common auditor effect is observed only for opaque borrowers, and is greatest when the same audit engagement office audits the bank and borrower. A common auditor connection also matters more for longer‐tenured auditors, for geographically proximate borrowers, and when the syndicate involves fewer lenders. The effect does not hold for auditors recently sanctioned by the PCAOB. Finally, the interest rate discount is not the consequence of homophily or biased decision making, based on a comparison of postloan performance of firms with common auditor loans versus those with noncommon auditor loans.     

存货质押贷款中银行对借款人的甄别—分离均衡

抵押贷款仅考虑借款人信用风险,存货质押贷款还应考虑质物价格风险。当银行时借款人事前违约概率具有不对称信息时,在DannyBen—shahar抵押贷款模型基础上,综合考虑借款人信用风险和质物价格风险,证明存在高风险借款人选择（高利率、高贷款价值比）合同,低风险借款人选择（低利率、低贷款价值比合同）的唯一分离均衡。     

Loan Sales and Borrowers’ Accounting Conservatism

We examine whether initial loan sales in the secondary loan market relate to borrowing firms’ accounting conservatism. We find that borrowing firms exhibit a significant decline in accounting conservatism after the initial loan sales. We show that the decline in borrower conservatism is more pronounced for firms that borrow from lenders with lower monitoring incentives and for firms that have lower incentives to supply conservatism. The baseline results are robust to a battery of sensitivity tests. Collectively, we provide corroborative evidence that lead lenders’ monitoring incentives enforce accounting conservatism in the private debt market, and that lead lenders play a more prominent role than secondary loan market participants in shaping corporate (conservative) reporting.     

Accounting Conservatism and Performance Covenants: A Signaling Approach

This study examines the relation between performance covenants in private debt contracting and conservative accounting under adverse selection. We find that under severe adverse selection (i.e., high information asymmetry), accounting conservatism and performance covenants act as complements to signal that the borrower is unlikely to appropriate wealth from the lender. No such relation obtains in a low information asymmetry regime. We further show that in the high information asymmetry regime, borrowers with high levels of conservatism and tight performance covenants generally enjoy lower interest rate spreads than borrowers with low levels of conservatism and loose performance covenants. Consistent with our signaling theory, in the high information asymmetry regime, borrowers with high levels of conservatism and tight performance covenants are less likely to make abnormal payouts to shareholders. Our empirical results are robust to alternative measures of conservatism and covenant restrictiveness.     

Corporate Tax Aggressiveness and Insider Trading

We examine the association between corporate tax aggressiveness and the profitability of insider trading under the assumption that insider trading profits reflect managerial opportunism. We document that insider purchase profitability, but not sales profitability, is significantly higher on average in more tax aggressive firms. We also find that the positive association between tax aggressiveness and insider purchase profitability is attenuated for firms with more effective monitoring and is accentuated for firms with a more opaque information environment. In addition, we provide empirical evidence that tax aggressiveness is significantly associated with greater insider sales volume in the fiscal year prior to a stock price crash. Finally, we find that the association between tax aggressiveness and insider purchase profitability weakens after the introduction of FIN 48, consistent with the increased transparency of tax positions under the new disclosure requirement reducing insiders' information advantage and hence their ability to profit from insider trading. To the extent that insider trading profits reflect managerial opportunism, our results are consistent with managers exploiting the opacity arising from tax aggressive activities to extract rent from shareholders, particularly those shareholders who sold their shares to the managers. Our findings are particularly important in light of the number of studies relying on the agency view of tax avoidance to develop arguments or to draw inferences.     

高管政治背景与民营企业盈利能力的实证研究

本文以我国2003—2007年在沪深交易所上市的民营企业为样本,实证研究了政治关系对民营企业盈利能力的影响,结果发现,高管的政治背景对公司盈利能力有显著的正面影响。进一步的研究还发现,高管的地方政治背景对公司盈利能力的正面影响要比中央政治背景的影响显著,而且董事长（副董事长）的政治背景对公司盈利能力的正面影响要比总经理的政治背景的影响显著。这些结果表明,政治关系是一种有价值的资源,有利于民营企业的发展。     

Growth opportunities,collateral and debt structure: the case of the Japanese machine manufacturing firms

We explore the determinants of debt structure by analyzing the Japanese machine manufacturing firms’ data from 1990 through 1996. We find that firms with abundant growth opportunities and scarce collateral are likely to borrow from banks rather than to issue bonds. This is robust even if we consider the simultaneous decision of the debt composition and leverage or managerial incentive. We also find that firms with abundant growth opportunities or collateral tend to depend on equity rather than on debt. Though banks reduce the agency costs of debt for growing firms, equity costs less than bank loans for them.     

Why are mortgage rates so uniform?

Conclusion Any reasonable model of mortgage lending concludes that interest rates depend on loan and borrower characteristics. In this paper, the rate is a function of the loan-to-value ratio, the parameters of the densities of future price of housing and income, deposit rate, and cost of foreclosure. Nevertheless, in practice, each lender charges only one rate to all borrowers. This is first explained by the difficulty of estimation of the parameters of the density functions. Since lenders cannot categorize their borrowers, they treat them uniformly and set minimum standards to minimize the risk of default by each borrower. Mortgage insurance, moreover, enables lenders to lend risklessly outside of the range in which they can operate risklessly on their own. Second, mortgage rate uniformity is explained by the lenders' risk aversion. Third, when borrowers are separated into discrete categories, uniform rates can result from perfect categorization of borrowers with respect to the future value of the relevant random variables. It is more likely, however, that lenders cannot categorize borrowers perfectly and that interest rates vary substantially among categories. As rates jump from one category to the next and borrowers are reluctant to gain small increases in loan size at significantly higher rates, lenders respond by offering only the basic category of loans.     

Determinants and effects of the use of COVID-19 business support programs in Japan

Using a survey of and financial data for Japanese small- and medium-enterprises (SMEs), this paper examines the determinants of firms’ use of the business support programs provided by the Japanese government during the COVID-19 pandemic and their effect. With respect to the determinants, we obtain the following three findings: First, firms were more likely to have obtained subsidized loans, grants, or subsidies the more their sales had fallen during the pandemic, suggesting that funds flowed to firms that were adversely affected by the pandemic. Second, the likelihood that firms obtained funds was higher if their credit scores were lower or if they were classified as “zombies” and/or “low-return borrowers” before the pandemic, suggesting that the government programs also helped firms that had been under-performing before the pandemic. Third, firms were more likely to receive funds if they had a stronger relationship with their main bank before, suggesting that bank relationships play an important role in firms’ access to government programs. Regarding the causal effects, we obtain the following three findings: First, except for the subsidies for employment adjustment, the support programs increased the cash holdings of user firms. Second, subsidized loans from private financial institutions lowered exit rates, while none of the programs had a significantly positive effect on employment relative to non-users (or in absolute terms). Third, the credit scores and profit-to-sales ratio of firms that used the support programs decreased and the likelihood of such firms being a zombie and/or a low-return borrower increased. Overall, our findings provide a cautionary tale in that the business support programs produced mixed results in that they may have prevented business failures but have also helped to prop up firms that are not viable in the long run.     

The roles of closure and selloff in corporate restructuring

This paper compares the roles of closure and selloff in corporate restructuring, by examining 749 Japanese firms engaged in these two types of divestment activities in the 1990s and 1146 subsidiaries divested by these firms. For closure, we find that (1) divesting firms tend to be less profitable than non-divesting firm, (2) divested subsidiaries have characteristics suggestive of inefficiencies, and (3) divesting firms’ profitability improved after the closure, albeit slowly. The results suggest that firms employ closure mainly to discontinue inefficient operations. For selloff, in contrast, we find that (4) divesting firms are no less profitable than non-divesting firms, (5) divesting firms’ profitability did not change but their investment intensity increased substantially around the divestiture, and (6) divested subsidiaries had characteristics of high salability and separability. The results suggest that selloff is used to raise funds for the remaining parts of divesting firm. Overall, our results suggest that closure and selloff play heterogeneous roles in the restructuring of Japanese firms.     

In the shadow of big tech lending

We investigate the impact of Big Tech lending on non-bank traditional lenders, which have a more overlapping clientele with Big Tech lenders than traditional banks. Our empirical methodology exploits geographical differences in Big Tech penetration ratios and adopts the instrumental variable (IV) approach using the FinTech payment adoption ratio and the distance to the Big Tech's headquarter. We find that the competition from Big Tech worsens the performance of branches facing stronger Big Tech competition by reducing the number of borrowers and the amount of loans. Moreover, branches in cities highly penetrated by Big Tech lending tighten the lending standard by reducing loan-to-value (LTV) ratios, measured as the approved loan amount per unit collateral value, while keeping the average collateral requirement unchanged. Our findings are consistent with the cream-skimming hypothesis that Big Techs possess better screening technology and reduce the quality of borrowers applying for traditional loans. Our results document novel changes in and responses of the non-bank traditional lending business in the Big Tech era.     

Bank Monitoring and Financial Reporting Quality: The Case of Accounts Receivable–Based Loans*

Using novel receivable-based loan data, we study the effect of aging-report loan covenants on borrowers' accounts receivable reporting quality. Our purpose is to highlight a channel that lenders use to obtain private information and to understand whether lenders' information acquisition affects the financial reporting quality of borrowers. Compared to receivable-based borrowers without aging-report requirements (control firms), borrowers with such requirements (test firms) increase their receivable reporting quality significantly after loan initiations. The shift in reporting quality is more pronounced when borrowers have weak bargaining power. Our results lend support to the argument that lender information access affects borrowers' reporting quality.     

Optimal Conservatism with Earnings Manipulation

This paper examines the role of conservatism when an agent can manipulate upcoming earnings before all uncertainty is resolved. An increase in conservatism, by reducing the likelihood of favorable earnings, requires steeper performance pay to maintain the same level of incentives, which in turn increases the equilibrium earnings manipulation. Trade‐offs between inducing effort and curbing manipulation predict an interior level of conservatism as optimal. The optimal level of conservatism is positively associated with enforcement, economic profitability and earnings quality, and negatively associated with agency frictions. In particular, we show that more economically profitable firms choose to be more conservative. We also establish that the association between performance pay and manipulation identifies whether conservatism is optimally chosen or exogenously imposed. In an application to debt contracting, we show that optimal conservatism is negatively associated with borrowers’ bargaining power.     

Balance sheet deterioration and credit allocations: Japanese evidence from the short-term economic survey of enterprises

This study is an empirical attempt to investigate the effects of balance sheet deterioration of Japanese firms and banks in the 1990s on credit allocation using the short-term economic survey of enterprises. This survey contains a unique item: proportion of firms perceiving the lending attitude as severe. After developing a theoretical model to link this item with the balance sheet conditions of borrowers and lenders, we estimate the relationship derived from the model. We find that credit was reduced when the balance sheet of firms and banks deteriorated. The effects are notably large for non-manufacturing industries.     

Trade liberalization induced profitability enhancement? The impact of intermediate input imports on firm profitability

Using the detailed data on production and transaction of Chinese manufacturing firms, we investigate how the input tariff liberalization affects firm profitability and explore the underlying channels of this effect. We find that input tariff reduction significantly increases firms’ profitability. Our finding is robust to a variety of specifications. We further find that the quality upgrading of imported intermediate inputs and the reduction of inventory costs are the main reasons for the profit-enhancing effect of input tariff reduction. Our study has important policy implications for the economic growth in the long run and the economic recovery during the epidemic of COVID-19.     

Balance Sheet Conservatism and Debt Contracting

We study the role of borrowers’ balance sheet conservatism (i.e., conservatism in asset values) in debt contract design. We find that borrowing costs are decreasing in the degree of balance sheet conservatism, and this effect is stronger for firms with lower credit quality. This is consistent with balance sheet conservatism reducing lenders’ uncertainty about the liquidation value of assets, thus facilitating the ex ante screening of borrowers. We predict that better ex ante screening also reduces the need for ex post monitoring, and find that balance sheet conservatism is associated with less restrictive covenant terms. Further, we find that asymmetric timeliness in earnings is associated with lower borrowing costs only when balance sheet conservatism is not high. This result suggests that lenders appear to recognize the constraining effect of high balance sheet conservatism on future conservatism in earnings.     

Monetary Policy and Borrowers’ Loan Defaults: Research Based on Data from Renrendai

This paper uses Renrendai data to study the relationship between monetary policy and the default behavior of borrowers, and analyzes the transmission channels. The research shows that tight monetary policy will lead to a significant increase in a borrower's probability to default, and this effect will continue for several months. There may be two transmission channels: (i) monetary policy changes a debtor's liquidity through credit and balance sheet channels, which directly affects their current repayment behavior; and (ii) monetary policy may affect a borrower's investment, production and profitability, thus changing their long‐term solvency. The paper also finds that the repayment behavior of productive borrowers is more susceptible to monetary policy than consumptive borrowers, and that the default behavior of borrowers in coastal provinces is more susceptible to monetary policy than of borrowers in inland provinces. These findings provide new evidence for understanding how monetary policy affects individual behavior and its transmission mechanisms.