We perform transaction-level analyses of entrusted loans – the largest component of shadow banking in China. There are two types – affiliated and non-affiliated. The latter involve a much higher interest rate than the former and official bank loan rates, and largely flow into the real estate industry. Both involve firms with privileged access to cheap capital to channel funds to less privileged firms and increase when credit is tight. The pricing of entrusted loans, especially that of non-affiliated loans, incorporates fundamental and informational risks. Stock market reactions suggest that both affiliated and non-affiliated loans are fairly-compensated investments.

/pdf/entrusted-loans-a-close-look-at-china-s-shadow-banking-m1fms59al5.pdf

Entrusted Loans: A Close Look at China's Shadow Banking System

https://www.cicfconf.org/sites/default/files/paper_637.pdf

Entrusted loans: a close look at china's shadow banking system

Manuscript Type
Empirical

Research Question/Issue
Past empirical efforts in corporate governance have examined the effects of large shareholders with excess control rights on tunneling activities. However, no study has systematically investigated the effects of multiple large shareholders on excess leverage policies and tunneling in an emerging country environment where minority rights protection is weak. In this study, we examine the role of multiple large shareholders and the effects of control contestability of multiple large shareholders on firm excess leverage decision and tunneling by controlling shareholders.

Research Findings/Insights
Using a sample of 2,341 Chinese firms for the years 2001 to 2013, we document that the contestability of multiple non-controlling large shareholders relative to controlling shareholders reduces the adoption of excess leverage policies, tunneling and enhances capital investment. Another intriguing finding is that the government, as a controlling shareholder, exerts significant influence and reduces the monitoring effectiveness of multiple larger shareholders.

Theoretical/Academic Implications
By addressing the role of multiple large shareholders on excess leverage decisions, this study makes an important contribution to the corporate governance literature. We extend the recent developments in agency theory regarding the role of multiple large shareholders in constraining expropriation of controlling shareholders with excess control rights and their effect on firm leverage decisions. Our results support the theoretical models which indicate that the presence of multiple large shareholders is an important and efficient internal governance mechanism that mitigates a firm's agency costs, particularly, in an emerging market environment where corporate governance is weak and inadequate to curb the tunneling problem.

/pdf/multiple-large-shareholders-excess-leverage-and-tunneling-4t2a61uz3x.pdf

Multiple large shareholders, excess leverage and tunneling: evidence from an emerging market

​Who gains from inter-corporate credit? To answer this question we investigate the reactions of the stock prices of both the issuing and receiving firms to the announcements of 719 inter-corporate loans that took place between 2005 and 2012 in China. We find that the average abnormal return for the issuers of inter-corporate loans is significantly negative, whereas the corresponding return for those firms receiving credit is positive. Investors may worry that issuing firms may have run out of other worthwhile projects to finance, while at the same time they may view credit-receiving firms as being certified as worthy borrowers. The issuance of intra-group loans, especially those with higher interest rates, is associated with lower returns overall since such loans may signal a spreading of financial distress to the rest of the group. After issuing inter-corporate loans, firms are also found to have lower accounting performance, which confirms the aforementioned signaling interpretation.

Who Gains from Credit Granted between Firms? Evidence from Inter-Corporate Loan Announcements Made in China

Manuscript Type
Review

Research Question/Issue
This article addresses the diverse and fragmented literature about the corporate governance of business groups. We collected scholarly work on the subject, proposed a conceptualization of the main research questions they addressed, classified them according to their research themes, and identified future research directions.

Research Findings/Insights
Academic research on corporate governance in business groups has been increasing but is still a developing field. Available analyses make use of the main theoretical frameworks in general in corporate governance research. However, there are several areas of analysis that still need stronger conceptualization and empirical work, leaving many opportunities for future studies and a pressing need to substantiate and extend the findings of previous studies.

Theoretical/Academic Implications
Our study identifies four avenues for future research on corporate governance in business groups. This includes the examination of the complex relationships and co-evolutionary processes among corporate governance attributes and organizational and performance outcomes of business groups; the effects of ownership goals on groups' performance outcomes; the role and the actual functioning of boards inside business groups; and the analyses of cross-national comparison and long-term development of the governance of business groups.

Practitioner/Policy Implications
This research allows practitioners and policymakers to get a better understanding of the crucial areas regarding business groups and their governance, and offers pathways to examine inside the “black-box” of business groups.

Business Groups and Corporate Governance: Review, Synthesis, and Extension

http://www.economiayadministracion.uc.cl/personal/blarrain/papers/ikm.pdf

The internal capital markets of business groups: Evidence from intra-group loans

We study business groups’ internal capital markets using a unique data set on intra-group lending in Chile (1990-2009). In line with groups’ financing advantage, firms that borrow internally have higher investment, leverage, and ROE than other firms. At the margin, controlling shareholders have higher cash-flow rights in borrowing firms than in lending firms. However, there is no robust evidence of minority shareholders losing out from intra-group loans as tunneling predicts. Our evidence is consistent with the idea that strict regulation and disclosure requirements for intra-group loans, which are features of the Chilean market, reduce the risk of expropriation in pyramids.

The Internal Capital Markets of Business Groups: Evidence from Intra-Group Loans

We study the inner workings of internal capital markets during the 2008-9 recession using a unique dataset of loans between business-group firms in an emerging market. Intra-group loans increase quickly during the recession. Firms that are more central in the ownership network simultaneously increase lending and borrowing. Acting like simple intermediaries, central firms do not increase net lending. Our results imply that formal control rights are essential for intermediation in internal capital markets, particularly during distress. In line with previous results on winner-picking, receivers of intra-group loans are high-Q, financiallyconstrained firms, which also perform significantly better than providers during the recession.

/pdf/how-do-internal-capital-markets-work-evidence-from-the-great-3ez5lzpehn.pdf

How Do Internal Capital Markets Work? Evidence from the Great Recession

We study the inner workings of internal capital markets during the 2008-9 recession using a unique dataset of loans between business-group firms in an emerging market. Intra-group loans increase quickly during the recession. Firms that are more central in the ownership network simultaneously increase lending and borrowing. Acting like simple intermediaries, central firms do not increase net lending. Our results imply that formal control rights are essential for intermediation in internal capital markets, particularly during distress. In line with previous results on winner-picking, receivers of intra-group loans are high-Q, financially-constrained firms, which also perform significantly better than providers during the recession.

Business groups are networks of firms connected by ownership links. We study the reaction of these networks to the 2008-9 crisis using a unique dataset of Chilean intra-group loans. Internal credit increases swiftly during the crisis. Firms that are more central in the ownership network simultaneously increase lending and borrowing. Like pure intermediaries, central firms keep net lending relatively constant. Central firms do not experience a significant fall in profitability relative to the average group firm, although receivers of intra-group loans perform significantly better. Our results show that control rights are essential for credit intermediation at times of distress.

David Buchuk

Papers

The internal capital markets of business groups: Evidence from intra-group loans

The Internal Capital Markets of Business Groups: Evidence from Intra-Group Loans

How Do Internal Capital Markets Work? Evidence from the Great Recession

How Do Internal Capital Markets Work? Evidence from the Great Recession

Overlapping Networks of Credit and Control