The Research Of Debt Cost Of Listed Corporation Under Institutional Context Of China

As the break-out of subprime crisis in America and sovereign debt crisis in Europe, finance security became a hot topic around both of the academic circle and practice circle. Bad asset of financial bank of China between the end of20th century and the beginning of21st century and debt crisis of local investment and financing platform indicate that finance security of China cannot be neglected neither. So how to improve the efficiency of the allocation of financial resources and prevent the risk of financial risk is important issue of this article. Improving the efficiency of the allocation is the main function of financial market. As the core of the market mechanism, price guides the allocation of the resource and is import influencing factor of cost of debt. This article attempt to analyze determinants of debt cost to reveal the efficiency of loan allocation in China.The basic logic of existing research is that conflicts of debt agency and default risk will increase the cost of debt. Jensen and Meckling (1976) had established a related model, and the researchers in and out of China measured the debt agency by debt cost when analyzing the mechanism influencing debt agency and default risk. These mechanisms include certain aspects of corporate governance, origin of law, content of law, efficiency of law implement, political institution and so on.Besides, existing research has analyzed debt in a context of transition economy, including how the local government influences the maturity of debt, debt structure, accesses of credit loan. But rare article had been written in the angle of debt cost under context of transition economy. So this article means to investigate this issue.In micro level and by the research of debt cost, this article means to analyze the efficiency of allocation of the loan resources and the institution factor influencing it, and further reveal the relation between intuition and financial risk. Besides, there is already much western literature about debt cost, but there are relatively less in China research. So this article introduces institutional factor of transition economy to the analysis of debt cost to rich the existing literature. The western research of debt cost has concentrated to the debt agency. The basic logic has based on the institutional assumption of mature market. The first assumption is the private property incentive, i.e. private property makes the creditor to pay close attention to the default risk. The second assumption is absence of the regulation of price of capital, i.e. in the theory of debt cost based on debt agency, both of the creditors and debtors can establish the price on their own. It is worth investigating whether these assumptions can stand in China.Chapter one is to introduce the context of this article, the researching significance, the researching method, the structure of this article and the value of the research.Chapter two is the review of the literature. The first part of the chapter is about the review of literature of debt cost. Jensen and Meckling (1976) first mention debt agency, and they suggest that conflicts of debt agency will increase debt cost. Since then, much literature has investigated the mechanism influencing the debt agency by the measure of debt cost. This part also summarizes the view of these literatures. The second part of this chapter is about the review of the literatures of government intervention. There are two hypothesizes on the role governments play in the economy, i.e. the grabbing hand hypothesis and the support hand hypothesis. This part reviews the literature about how the government impact investment, financing, Mergers and acquisitions, governance of corporate.In the transition economy of China, Administrative implications go deep into every aspects of economy. Operate decisions of corporate and banks also are affected by the behavior of government. The main literature has supported the view of grabbing-hand hypothesis.Chapter three is to elaborate the theoretical basis. The first part is about the corporate governance, debt contract, and effects of institution to the economic contracts, and all of these are under the theory of contract. This part also elaborates the institutional nature of the debt contract and agency relation within the corporation.In the category which the institutional economy defines, epitaxial of institution is very broad, including custom, law, contract and institution. Contracts belong to the category of micro institution. And the synchronic association of institution suggests that institutions of a region are interrelated to each other during the same period. So debt contract must be affected by other social and economic institution of other field. The second part of this chapter is to elaborate the theory of government intervention, including theory of market failure and theory of government failure, hypothesis of grabbing hand and hypothesis of support hand, theory on the relation of government and bank, the root cause of government intervention, motivation and means of the government intervention. These theory constitute the basis of the analysis of the relation between government and debt cost below.Chapter four is to about the institutional context of transaction economy which may cause the theory of cost of debt to be different from the one under the mature-market condition. These institution factors include financial institution and the institution related to the behavior of local governments. The first part elaborates the financial institution, including the main financing methods of corporation, the management and the property of banks, regulation of capital price, development of credit rating, and even conceptual factors (Credit discrimination) can be affects the sensitivity of debt cost to the debt agency. In the other hand, Market-oriented reform of commercial bank and interest rates can improve the sensitivity of debt cost to the debt agency. The second part is about the effects of the local governments to the local institution environment and allocation of loan resources. As reform of the tax and fiscal system, the local governments begin to vie for financial resource to meet the needs of funds for local economic growth, and the intervention of government plays an important role on the quality of local institution environment and efficiency of loan allocation. So this chapter is to elaborate these institutions behind the interventional behavior.Chapter five is the empirical analysis of the debt cost under the institutional context of China, using data of large sample. First part of the empirical analysis is to answer three questions,(1) Whether the expropriation of corporation can affect the debt cost significantly?(2) Whether quality of local institution environment determined by the law and intervention of local government affect debt cost significantly?(3) Whether the intervention behavior of local governments weakens the mechanism through which expropriation affects debt cost. The second part of the empirical analysis is to find out whether the increase of influence of local listed corporation leads to the local governments’support through affecting the price of loan capital. The main results of the empirical analysis suggest that debt cost increases when the expropriation becomes serious and the quality of local institution environment is low. When GDP growth slows down, intervention of local government reduces the sensitivity of debt cost to the expropriation. The smaller the number of local listed corporations is, then the greater the influence of the listed corporations to the local economy, the lower the debt cost of these listed corporations is. Finally this chapter tests the influence of these factors to the probability of financial crisis, and fine that when expropriation become serious and quality of local institutional environment is low, the probability of financial crisis becomes high. So effects of theses factor to debt cost reflects rational judgments of banks to the loan risk. But the slowdown of economic growth and local number of listed corporation has no effects to the probability of financial crisis, and so these factors reflect the distortion of loan allocation by the intervention of local government.Chapter six is summary of the article which elaborates theoretical and political implication, and indicates the limitation of this article and prospect of the forward research.Conclusions of the article are as follows:In one hand, under institutional context of China, debt cost is significantly affected by corporate governance and quality of local institutional environment. So, debt contract has market characteristic in transaction economy of China, suggesting that market-oriented reform of commercial bank and interest has achieved some goals and efficiency of loan-resources allocation has been improved. Market-oriented reform in financial market should be pushed on further, including getting rid of Soft budget constraint of financial institutions, increasing diversity of financial institutions, so that resource-allocating function of capital price can be improved. In the other hand, debt cost is affected by the intervention of local governanment, which is different from debt cost theory under context of mature market. Because executive power of local government plays an import role in economy, determination of debt cost is partly different from mature market conditions. Intervention of local government distorted the formation mechanism of loan price, and reduces efficiency of resource allocation. Unreasonable intervention of local government comes into important influencing factors of financial risk in China. So to improve the allocation of financial resources, not only the reform in financial institution is needed, but also institution reform in other area must be pulled on together. Integrity of social and economic institution suggest that institutional changing in certain area must be complemented by institutional changing of other area to achieve the goals.Innovations of the article are as follows:Firstly, early papers investigating debt cost is basically to analyze mechanism influencing debt agency and default risk by measure of debt cost, and do not break through the classical theory framework. This article test the influence of expropriation and quality of local institution environment to debt cost, and get the same phenomenon as the one in mature market. This article further test institutional factors influencing debt cost that are characteristic in the transition economy, and finds out that intervention of local government to the loan resources allocation is another influencing factor of debt cost. So this research riches the literature around debt cost. Secondly, this article investigates how these factors influence the default risk, and reveal the internal mechanism of how the debt cost is affected. In one hand, debt cost is significantly affected by expropriation and quality of local institutional environment, which is rational decision of bank, based on default risk and is characteristic of market mechanism. In the other hand, debt cost is affected by the government intervention, and these factors are not related to the default risk, which is distortion of loan resources allocation. Finally, part of early research in China on debt cost measuring debt cost by the interest data obtained in the loan contracts. But most of the loan contracts are not accessible and so leads to limitation on the size of sample. Some literatures use ratio of interest expense and debt, adjusted by current benchmark interest rate. This article adoptes the later measure, and this measure further adjusted by industry-year mean to avoid effects of industry policy to the corporate loan. To reduce the bias, this article introduces constructions in process as a controlling variable in the model to reduce the effects of capitalizing of interest according to the accounting standards of China. Besides, debt maturity is introduced to the model to controlling the bias caused by the tight relation between debt maturity and debt interest. So this article has improved the researching model of debt cost.