Corporate Misconduct and the Cost of Private Debt : Evidence from China

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Title: Corporate Misconduct and the Cost of Private Debt : Evidence from China
Author: Gu, Xian ; Hasan, Iftekhar ; Lu, Haitian
Series: Comparative Economic Studies
Series volume: 61
Series number: 3 ; September
Year of publication: 2019
Publication date: 15.9.2019
Pages: 443–463
Keywords: Kiina; yritykset; väärinkäytökset; luotot; korot; kustannukset; oikeustapaukset; politiikka; suhteet
JEL: G1; G14; L14
Other keywords: Litigation; Loan spreads; Political connection; Relationship
Abstract: Using a comprehensive dataset of corporate lawsuits in China, we investigate the implications of corporate misconduct on the cost of private debt. Evidence reveals that firms involved in litigations obtain subsequent loans with stricter pricing terms, 15.1 percent higher loan spreads, than non-litigated borrowers. Strong political connection and repeated relationship help to flatten the sensitivity of loan pricing to litigation. Nonbank financial institutions react in stronger manner to corporate misconduct than traditional banks in pricing loans. Overall, we show that private debt holders care about borrowers’ wrongdoing in the past.

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