Bank Monitoring And The Effectiveness Of Corporate Governance

The real estate industry depends remarkably on bank credits, such as land reverse, real estate development, construction, investment, terminal consumption etc., none of these activities could do without support from bank credit, therefore, bank play an important role in the real estate companies. Then, the credit policy becomes an important tool to regulate real estate market. "Circular on Further Strengthening the management of real estate credit business" (DOCUMENT 121) issued by the People's Bank of China on June 5,2003, increased monitoring of real estate development companies, such as the prohibition of loans with liquid assets and loaning money from construction enterprises, strict control on the loans for land reverse. After that, a variety of financial policies have been put forward to maintain the health and scientific development of the real estate market. On the one hand, such frequent issuing of financial policies highlight the key position of banks in the real estate industry, on the other hand, it also exposed the credit risk confronted by banks.Due to the absence of state-owned enterprises and the control of large shareholders in private enterprises, the phenomenon of insider control (controlling shareholders and managers) in listed companies are so prevalent in China. The opportunistic behavior of insiders among listed companies will bring some negative effects, such as high consumption, high salaries, expansionary desire for "Corporate Empire", engrossing funds of controlling shareholder and related party transactions, all of which are threatening the vital interests of banks and other creditors. While the loan "three looked up (loan, to investigate, in loan examined, loan, inspection)" system can help the bank recognize the business and financial condition to some extent, but after the acting of loan contract, the bank as the "outsider" has always been difficult to intervene business activities, even though the "inspection" is also difficult to monitor the opportunistic behavior of insiders. Therefore, the risk of bank credit is not only from financial risks, but also from the risk of corporate governance; bank credit risk is not only from the pre-selection, but also from the ex post moral hazard; it is not only from internal corporate, but also from institutional factors. Many scholars believed that creditors can improve the corporate governance efficiency (e.g. Grossman & Hart,1982; Diamond,1984; Fama,1985; Jensen,1986; etc.). This study suggests that, because of the dispersive characteristics of creditors, the influence of commercial credit and corporate bonds on the corporate governance may be weakened and the cost of monitoring will be high. But the bank can act as the "trustee" for plenty of spread creditors to supervise the loan business, relying on their "expert-type" specialties and information superiority. So it will be more meaningful to separate the bank credit from other liabilities and study the efficiency of supervisory on corporate governance.China is going through the transition period, governmental control and intervention, information problems, misguided regulations and inefficient judicial systems are widely existed (Khanna & Palepu,1997; Peng & Heath,1996; Peng, 2003), while the two strategic resources of real estate companies (bank loans and land reserves) are controlled in the hands of government. In addition, creditors still need a perfect legal system to play the monitoring role (Shleifer & Vishny,1997). Therefore, this research integrated the bank monitoring, corporate governance, governmental control and legal environment into a logical framework, in order to study of relationship between real estate companies, banks, government, and (legal) institution. Generally, this paper analyzed the relationship between bank monitoring and the effectiveness of corporate governance based on three main lines:the "bank monitoring and agency costs of manager", "bank monitoring and agency costs of controlling shareholder" and "bank monitoring and firm performance". Besides, this study described the institutional environment from four aspects:institutional change of commercial banks, governmental control, relationship between banks and real estate business, legal environment. At the same time, it combined the institutional environment with the three main lines. This paper gathered data from 41 listed real estate companies during 2003-2008 and applied document study, comparative analysis, mediation effect test and econometric modeling, finally obtained a number of conclusions of theoretical and application value.The results show that:(1) the relationships between bank monitoring and corporate governance efficiency were significantly different. Specifically, the bank monitoring and the managerial agency costs have a positive relationship, while agency managers are not reducing the cost related to strict bank monitoring, but improving the agency costs; Bank monitoring and controlling shareholder agency costs negatively related, while monitoring helps to reduce holding shareholder agency costs; Bank monitoring and firm performance negatively related, and the efficiency of bank monitoring is in the twisted state. (2) The relationships between governmental control (the actual controller) and corporate governance efficiency were significantly same; that is both the relationship between government-controlled and manager agency costs, and the relationship between the costs of controlling shareholder agency and corporate performance (ROA and ROE) have shown a positive correlation. This shows that both of controlling shareholder agency costs and managerial agency costs in state-owned enterprises were significantly higher than non-state enterprises, but government-controled is help to improve business performance in real estate listed companies. (3) Banking monitoring and managers agency costs were more positively related, and the controlling shareholder agency costs and firm performance were more negatively related in state-owned listed real estate companies compared to non-listed ones. When the dependent variable is the manager agency costs or business performance, the government-controlled has led bank monitoring to soft budget constraint, and the effectiveness of banking monitoring has been distorted. But the bank monitoring can significantly reduce the controlling shareholders agency costs, and such kinds of relations in state-owned enterprises could be more significant. (4) As the impacts on managers agency costs, controlling shareholder agency costs and firm performance, bank monitoring, as an external governance mechanism, shows interaction with most of the internal mechanism, which means to alternative or complementary relationship. (5) The improved legal environment for creditor protection can significantly reduce these two kinds of agency costs and improve firm performance. So the legal environment in corporate governance is very important. (6) As the impacts on controlling shareholder agency costs and corporate performance, bank monitoring and legal environments show significant interaction effect. On the one hand, the legal system itself is a governance mechanism that can play a role in corporate governance; on the other hand, banks and enterprises constitute a contractual relationship, which also needs a perfect legal system as a guarantee.This study has the following innovations drawn from the above conclusions: First, this paper studied the relationship between bank monitoring and the effectiveness of corporate governance based on Chinese institutional context (government-controlled, legal environment), which is an important expanded on capital structure theory, Berle-Means and LLSV paradigms; Second, this paper studied the interaction between bank monitoring, as an external governance mechanisms, and the traditional internal corporate governance mechanisms (such as the largest shareholder, check and balances of ownership structure, the Board size, executive compensation, manager ownership, etc.) and legal environment. This interaction (referring to alternative or complementary relationship) do existed. Third, this study applied a sample of listed real estate companies in China, following closely characteristics of bank credit in real estate industry. It studied interaction mechanisms and the relationship between bank monitoring and corporate governance effectiveness respectively from the normative and empirical methods. It not only provided a channel for the re'itionship study between external governance mechanisms (such as product market competition, labor market competition, audit, and media, etc.) and the effectiveness of corporate governance, but also enriched the empirical literatures of agency theory and capital structure theory.The study concluded that we should understand "government-enterprise relations", "bank-enterprise relationship" and legal institution from multiple aspects. Despite the large amount of literature shows that government control increased the agency costs, reducing the corporate value and harming the interests of outside investors, this study shows that government control increased agency costs, but the government control has unique advantages to land reserves and bank credit that can improve firm performance. Therefore, government control is not without merit. Role of bank monitoring is not completely distorted, at least in the listed real estate companies; this mechanism can reduce the agency costs of controlling shareholders. In addition, although the improvement of legal environment will be benefit to reduce agency costs and improve firm performance, but the interaction between legal environment and bank monitoring is sometimes unsatisfactory, a perfect legal system may lead the bank to be "lazy" and increase the agency costs, just as Chapter V of this research, the interaction term between bank monitoring and the legal environment constitute a positive correlation with the controlling shareholder agency costs. Therefore, the practice of reform should be wary of two hazards:First, if we stubbornly oppose to government control and learn from western market mechanism blindly as the market economy system is still imperfection, it will lead to social disorder and high disordered costs of our socity; second, if we have developed a very perfect market economy system in the background, if government control is still widespread, then it is easy to form a social tyranny, and high costs of social tyranny will be formed.