Abstract
ABSTRACTWe hypothesize that informal bank networks influence corporate credit access in China. Our sample comprises a panel of 515 corporations listed on China's stock exchanges with a total of 1,052 firm-year observations, holding a total of 7,009 major bank loans from 183 distinct banks between 2007 and 2012. Results support the hypothesis that closure in bank networks facilitates credit access. We further show that the positive closure-performance association offers fewer advantages if financial markets and the legal infrastructure are relatively well developed. Our findings contribute to an emergent literature examining how informal networks can productively substitute weak formal institutions, and how the interplay between informal networks and network embeddedness shapes individual and corporate strategies.
Highlights
In China, corporate loans are difficult to obtain without having the ‘right connections’
These temporal and regional variations, obscured in the summary account, support our assertion that the association between informal bank networks and credit access is highly contingent on environmental factors
Firms experienced higher levels of market uncertainty in 2007–2008 than in later years, while the average legal environment index has fluctuated over the period between 3.1 and 3.3, suggesting rather neutral evaluations over the sample period, with provinces such as Tianjin, Hainan, Guanxi, Chongqing, and Shaanxi experiencing the largest increases in perceived quality (0.4–0.5 points)
Summary
In China, corporate loans are difficult to obtain without having the ‘right connections’. Assuming a fluid adjustment of relational strategies in response to environmental changes (Bian & Zhang, 2014; Chang, 2011), we predict that close interbank ties yield smaller benefits if environmental uncertainties are low and if trust-producing formal institutions become available We test these hypotheses using a panel of 515 firms listed on China’s two stock exchanges in Shanghai and Shenzhen, with a total of 1,052 firm-year observations. China’s four major state-owned commercial banks have been (partly) privatized and new competitors – mostly domestic shareholding banks – have entered the market, the sector suffers from inefficiencies, high overhead costs, and non-performing loans (Allen, Qian, & Qian, 2005) These problems are closely linked with the development and enforcement of financial market rules and regulations. We predict: Hypothesis 3: The more developed the surrounding financial market environment, the smaller the credit access advantages associated with closure in a corporation’s bank network. Only 10 percent of all firm-year observations in the sample feature no variation in the
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