Government intervention and firm long-term bank debt: evidence from China

Abstract

PurposeThis paper aims to examine whether government intervention acts as a substitution mechanism for laws and institutions in affecting firms’ long-term debt financing decision and the moderating effect of firm ownership on the relationship between law and finance in Chinese capital market.Design/methodology/approachThis study uses ordinary least squares with standard errors clustered at the firm level in the regressions. To address the potential endogeneity problem, the authors also use the system generalized method of moments in their estimation.FindingsThe results show that both long-term bank debt and long-term bank debt maturity structure ratios are positively related to government intervention. The results also reveal that with improvement in the legal environment, public non-state-owned firms have more access to long-term bank debt in the regions where the level of government intervention is low.Research limitations/implicationsGovernment intervention appears to replace laws and institutions in influencing the allocation of financial resources in China.Originality/valueThe finding suggests the necessity of increasing the protection of both creditors and investors, and shows the importance of a free and independent judiciary system in allocating funds to private firms. The results also imply that the non-state-owned Chinese firms also benefit from the improved laws and institutions.