The Governance Effect Of The Credit Contract

Debt financing governance is one of indispensable parts of the corporate governance mechanisms, because the credit contract, as a main means of governance, could alleviate interest conflicts between shareholders and executives, and could motivate the latter one to work hard. Take a major way of debt financing for example, bank loan, which can not only fit the financing demand, but can also realize its governance effect by changing governance structure. However, many scholars in China indicated that, instead of attaching enough importance to bank loans'advance in governance, Chinese listed companies apply for bank loans mainly only for fitting their fund demand. The Accounting Division of the Ministry of Finance reported in a study on financial performances of listed companies in year 2008 that, banks has issued 3.9 trillion Yuan's loans to 1597 non-financial listed companies during year 2007, but until that year end, those listed companies still kept about 1.3 trillion Yuan's loans totally in their banks'accounts. So, after analyzing those non-financial listed companies'performance, The Accounting Division concluded that, those companies are sufficient in liquidity, and most of them might have invested their bank loans into stock market and real estate market for short-term gains. Generally, bank loans should be used for meeting fund demands of project investment or operating capital. So, those non-financial listed companies are definitely against the banks'interests by switching loans to stock market and real estate market with high investment risk. However, if banks want their loans to be safe, how should they make the credit decisions? Why did the credit contract fail in restraining company's operators from abusing loans? According to those practical problems, research on governance effect of the credit contract is very significant and meaningful.Because of variety and complexity of the credit contracts, this dissertation emphasizes on governance effect of credit contracts'basic elements, such as the loan scale, loan term and the loan interest rate. Due to the incompleteness of the credit contract, debt renegotiations become very important. So this dissertation also analyzes the governance effect of debt renegotiations. This dissertation adopts both of normative methods and empirical methods which showed during the research approach as follows, "the theoretical basis→the theoretical analysis→the environment analysis→the empirical analysis". Chapter 1 is Introduction. Chapter 2 is Review and Comments on Governance Effect of the Credit Contract, is the part of theoretical basis, and is the framework of the following parts of theoretical analysis and empirical analysis. Chapter 3, Theoretical Analysis on Governance effect of the Credit Contract, is theoretical foundation of the empirical analysis. Chapter 4, Analysis on institutional background of China's credit contract governance, analyses those environment elements that influenced governance effect of the credit contract in China. Chapter 5, Empirical Analysis on the Influence Factors of Credit Decision-Making, and Chapter 6, Empirical Test on Information Transparency and Governance Effect of the Credit Contract, consist of this dissertation's empirical parts. Chapter 5 tests the influence factors of credit decision-making before signing the credit contract, so it provides evidence of whether the credit contract has governance effect or not. Then Chapter 6 analyzes whether the signed credit contract could stimulate or restrain the operators, i.e., the governance effect of the credit contracts. Chapter 7, Conclutions, summarizes the major conclusions and suggestions to improve governance effect, and points some limitations of this dissertation and several research directions in the future. The major contents are as follows:Chapter 1 introduces the meaning of this selected topic, key concepts, outline and organization, research methods, and summarizes the major conclusions and points of innovation.Chapter 2 based on the enterprise contract theory and the information asymmetry theory, reviews the debt's governance function, and deduces bank's advantages in obtaining information and supervising in corporate governance, which make research on the governance effect of the debt contract becomes meaningful. Then the chapter makes comments on deficiency of the past relevant research, according to which deduces this dissertation's topic.Chapter 3 discusses the information basis and conditions to achieve good credit contract governance firstly. The chapter analyses the information basis due to the information asymmetry, and demonstrates the conditions to realize the governance effect of the credit contract. That is, the fulfillment mechanism of debt, the ability and motivation of bank's monitoring, the feasibility of credit contract's incentive and monitoring. Secondly, premising the information basis is well and the conditions are good for realizing, aims at designing optimal credit contract elements and guided by this aim, this chapter analyses the governance effect of the load limit, load term and load interest rate based on the incentive mechanism. The result shows that, when the incentive mechanism exists, if the credit contract fits the constraints both of the incentive compatibility and the clear expenses, factors of the load limit, load term and load interest rate could stimulate operators to work hard. Besides, this chapter also analyzes the governance effect of the debt renegotiation, studies the incentive of debt relief by building a theoretical model. The result shows that, debt relief only could stimulate executives to work hard to some extent But the relationships between debt relief and quality of the company are negative, i.e., the more debts are relieved, the worse is the financial condition of the companies. It means that debt relief would also have a signaling function and this function could stimulate executives to improve the companies'performance.Chapter 4 discusses the institutional environment in China from aspects of legal system and government intervention, which shows the environment factors'influence on the credit contract governance effect. The analysis results that, institutional background in China does not supply a good foundation and conditions for implementing the credit contract governance.Chapter 5 tests the influencing factors of credit decision making. By selecting the financial data of non-financial listed companies in China during 2004 to 2008 period as sample, analyzes by Eviews and SPSS software to carry out multiple regression analysis to test the influencing factors. If credit decision-making and listed companies'financial conditions and corporate governance have strong causality, it means that the credit contract could stimulate the executives to work hard for getting bank loans or getting favorable interest rate, i.e., the credit contract has governance effect. The empirical analysis results that, there is causality between the factors—load scale, load term and load interest rate—and the companies'financial condition and governance situation. It means that loan scale and loan term have governance effect, and loan scale's effect is stronger than loan term's. Loan interest rate only has weak relationship with financial condition and governance situation. It means that load interest rate almost has any governance effect. This may be because of interest supervision from government. In terms of their degree of strength of governance effect, those contracts'factors align as follows in descending order: loan scale, load term and load interest term.Chapter 6 is based on chapter 5's empirical results, tests the governance effect of credit contract and the influence to it given by the information transparency. The result of multiple regression analysis shows that, loan scale, long-term loan and short-term loan don't have governance effect, i.e., short-term loans could increase the agency costs, and long-term loans could decrease explicit corporate performance (ROA and ROE). Such findings draw a conclusion that China's distinctive institutions couldn't provide a good environment for the realization of governance effect. This chapter regard information disclosure quality as the proxy variable, and regard information disclosure quality and credit contract elements (the load scale, long-term load, and short-term load) as interaction Coefficient to reflect the transparency's effect on credit contracts governance. The empirical results show that, the increase of information disclosure doesn't improve the credit contracts'governance effect, but have negative effect on short-term loans. Such findings draw a conclusion that China's distinctive institution couldn't provide enough information for the realization of credit contract's governance effect.Chapter 7 is the conclusions. This chapter focuses on the policies and recommendations to improve the governance effect of credit contract:first, to improve the governance environment of credit contract, which could supply a good environment for the realization of the credit contract governance; second, to improve the quality of information disclosure, which could provide a good information basis for the credit contract; third, to establish and to improve the signal transduction mechanism of debt relief, and to inspire the debt renegotiation's governance function.Scholars at home and abroad have researched on the credit contract governance widely. This dissertation explores and furthers the research of credit contract upon such foundations, which could be added into debt governance theory. The highlights of this dissertation are as follows:Firstly, innovates in designing the research angle. Based on Information Asymmetry and enterprise contract theories, This dissertation researches the governance effect of the loan scale, loan term and loan interest rate from the perspective of credit contract elements' incentives mechanism, which could help to enrich the debt financing governance theory, and give advice on how to improve the governance of credit contract. Secondly, innovates in designing the research object. This dissertation studies both credit contract and debt renegotiation, and regards the most common result of debt renegotiation—debt relief—as research object, and finds the signal transmission function of debt relief by designing and testing theoretical model.Thirdly, innovates in designing the empirical research. This empirical study regards the moment of credit contract signature as a cutoff point, testes the credit decision-making factors before the signature and the governance effect after the signature. The test of the credit contract effect is to examine whether there is reasonable causation between the credit decision and the company's financial condition and corporate governance. Whether there is an incentive for executives to work hard in order to obtain loans. Then this dissertation verifies the incentive and constraint of credit contract to the executives, which keep the continuity of the empirical study. In variable selection, there are three ways to measure the governance effect of credit contract:first, management expense ratio is used to measure the agency cost of executives'manipulation of cash flow in-job consumption; secondly the total return on assets (ROA) is used to measure the performance resulting from executives' efforts of work; thirdly, return on equity (ROE) is used to measure the integrated performance both of the executives'hard work and the debt leverage. The interaction coefficient, measures the relationship of the information disclosure quality and the credit contract factors, is used to reflect the information transparency'effect on the credit contract governance.Restricted by the research capacity, this dissertation still has many limitations and shortcomings, which also guides the future research approach.