Ownership Type, Corporate Diversification and Cost of Borrowing: Evidence from China

所有權類型、公司多元化與借款成本:來自中國的證據

Student thesis: Doctoral Thesis

View graph of relations

Author(s)

  • Ye SUN

Related Research Unit(s)

Detail(s)

Awarding Institution
Supervisors/Advisors
Award date11 Sep 2015

Abstract

Using a sample of long-term loan contracts that are mandatorily disclosed by Chinese listed companies from 2009-2012, I examine whether firm industry diversification strategy is considered as an important determinant when private creditors set the price of loans. The empirical results show that the net effect of diversification to cost of debt varies with ownership types. Non-state-owned enterprises (i.e., Non-SOEs) have more financial constraints but fewer problems in overinvestment and inefficient cross-subsidization relative to their SOE counterparts. Therefore creditors value the coinsurance effect of diversification in non-SOEs and charge lower loan price for diversified non-SOEs than focused ones. As to SOEs, governments’ direct and indirect supports ease their financial constraints’ pressure which to some extent mitigates the benefit of coinsurance. I find there is no significant difference on cost of private debt between diversified firms and focused firms in SOE samples.
To provide further evidences on the channels through which diversification affects the debt price, I construct measures that capture coinsurance effect and inefficient resource transfer, respectively. I find that the price of private debt significantly decreases with the degree of imperfect cross-segment correlation in non-SOE sample, but insignificant in SOE sample. I also find that, for SOE sample, the price of private debt significantly increases with the disparity of cross-segment investment opportunities, which reflects the propensity of inefficient resource transfer. Taken together, the above results indicate the inherent discrepancy of SOEs and non-SOEs on operating environment and corporate behavior impacts the creditors’ assessment on the risk effect of diversification.
In additional tests, I find that the positive relation between cost of borrowing and diversification or potential inefficient transfer risk proxy in SOEs is significantly weakened when the lender is state-owned banks relative to non-state-owned banks and when the regional financial marketization degree is lower. However, the ownership of banks does not influence the main findings in non-SOEs. These results
are consistent with the argument that government intervention has an influence on lenders’ loan contracting decisions beyond the economic concerns, especially to SOEs.
My study provides evidence for understanding the creditors’ assessment on the benefit and cost of corporate industrial diversification in different ownership, extending prior literature to the context of emerging market. In particular, my results provide useful insights into the channels of coinsurance effect and inefficient transfer risk through which diversification influences loan pricing.