Abstract
This study provides evidence that the signaling effect of policy loans can influence commercial banks' loan decisions in China. After obtaining policy loans, firms convey mixed signals to commercial banks. These signals include the certification signal (indicating that firms are of high quality) and the endorsement signal (showing that firms have an implicit guarantee from the government), thus alleviating the information asymmetry between commercial banks and firms. Our results indicate that commercial banks follow policy banks and respond to the signaling effect of policy loans by granting more loans and relaxing loan terms.
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