Bank IPO and Lending Practices An Empirical Study in China

Abstract

Does an initial public offering (IPO) improve bank lending in developing economies? Our paper aims to address this question using a sample of Chinese banks. We find that banks place a greater weight on borrower performance in determining lending terms following bank IPOs. We also find a significant increase in borrower accounting conservatism post lender IPO. The combined evidence suggests that going public improves banks’ incentives for both screening and monitoring. In the cross section, these changes are more pronounced for banks with larger improvements in corporate governance and performance, for those with state ownership, and for periods after the split share reform. Our findings suggest that partial privatization through an IPO is a viable mechanism for state-owned banks in China to improve lending practices. These findings have important implications for policymakers from other developing economies.