Geographical Relationship Of Executives And Corporate Bank Credit Resources

As a typical representative of emerging markets, financing difficulties have been a key factor restricting the development of enterprises in China, especially private enterprises. In China, a large number of political and economic resources are inclined to state-owned enterprises, and private enterprises have been facing financing difficulties for a long time (Cull et al., 2015). As one of the important approaches to corporate debt financing, bank loans have accounted for more than 60% of the total financing scale of entity enterprises in recent years, and also, they are essential key resources for enterprise development. Under the background that China's economic growth has entered a new normal,enterprises are faced with difficulties such as narrowing financing channels and rising costs. Therefore, how to obtain favorable bank loan contracts has become the focus of enterprise management. In countries with economies in transition,due to incomplete formal institutional arrangements, it is difficult for enterprises to obtain sufficient resources within the formal institutional framework. Instead,enterprises will use informal institutions such as reputation and interpersonal relations to help them obtain financing (Allen et al., 2005). Therefore, how to break the institutional environment constraint and the development bottleneck through the alternative mechanism has become one of the important issues concerned by the academic circle.According to the embeddedness theory, any entrepreneur or business is trading within its social network. As an informal institutional arrangement,social networks have a resource allocation effect, which can help enterprises obtain more resources at a lower cost (Dahl and Pedersen, 2005). Previous researches on the social network of senior executives are mostly based on their career experiences, such as working experience and education experience, etc.,which are measured in a single way. However, the relationship relied on by Chinese exchanges is not single and direct. At the same time, the relationship between government and business, and the relationship between Banks and enterprises concerned in the literature is acquired and established at a certain cost, ignoring the natural social network-- geographical network brought by the social identity of senior executives. As the embodiment of population distribution in social relations, geographical relationship is an important concept in the study of China's social relations. Geographical factor is an important support of social network, and the geographical network formed by the aggregation of geographical relation is a key link in the differential pattern interpersonal relationship in China. However, previous studies paid less attention to the geographical network, ignoring the important role played by geographical network in reducing transaction costs and facilitating transaction conclusion in China's "relational" society. Therefore, this paper attempts to answer the question whether the geographic network of senior executives can provide a feasible solution to the problem of formal financing.This paper takes the bank credit contract as the entry point to test whether the senior executives' geographical relations can solve the financing problem.This is not just because our country's financial system has long been " bank leading", bank financing is the main financing way of enterprises in our country,and more importantly, the bank credit market has regional characteristics (Li,2006), the existing data also confirmed that the enterprise usually get bank loans from their cities or provinces, which matches the regional characteristics of the senior executives' geographical network. This paper holds that, due to the financial information and other "hard" information is difficult to fully convey the future repayment ability of enterprises, non-financial information and other "soft" information also have an important impact on bank credit contracts.Geographical network provides a reliable channel for "soft" information, which is helpful for Banks to make a more accurate evaluation of enterprise status. On the other hand, the executive's emphasis on its reputation in the network to a certain extent played a supervision and restraint function, especially by the thousands of years of Confucianism and the influence of traditional culture, people very value their reputation at hometown. Geographical network can increase trading by mortgage his reputation for credibility, and thus get more credit resources,namely the reputation mortgage channels of geographical network. Therefore,based on the information transmission channel and the reputation mortgage channel of geographical network, this paper proposes the bank credit effect of executives' geographical relation, and investigates the difference of bank credit effect in enterprises with different property rights. Furthermore, this paper examines the differences in the bank credit effect of executives' geographical relation in different regions, industries and banking characteristics through cross-sectional analysis. On this basis, this paper examines the economic consequences of bank credit effect from the perspectives of financing constraint,investment efficiency and credit default.To be specific, this paper first measures whether the executives have geographical relationship in the location of the enterprise based on whether the birthplace of the executives(CEO) of the listed enterprises is consistent with the registration place of the enterprises, and tests the bank credit effect of the executives' geographical relationship. The results show that compared with the executives from other places, the enterprises where the local executives work have more bank loans and longer loan terms, that is, the bank credit effect exists in the geographical relationship. Moreover, among enterprises with different property rights, the bank credit effect brought by executives' geographical relationship is different. Compared with state-owned enterprises, this bank credit effect is more obvious in private enterprises. In further inspection, this paper examines the other features of bank credit contract, the results revealed that the local executives are more likely to get loans from local Banks in the enterprise, has a lower cost of bank loans, and are more likely to take the way of credit instead of mortgage. These findings effectively support the main research conclusions of this paper. In order to eliminate potential alternative explanations,this paper separately designed to exclude the interference of other key social relations, the enterprise's local operation degree and the enterprise's external financing demand. In order to guarantee the reliability of the research conclusion,this paper conducted a series of stability test, using PSM and instrumental variables to solve the potential endogeneity problem, change model, the change of geopolitical relations index measure, adjustment of sample and so on. The results above guarantee the robustness of the main research findings in this paper.Secondly, this paper explores the differences in the bank loan effect of senior executives' geographical relations under different regions, industries and bank characteristics. The results show that under different regional characteristics, in regions with low population mobility, the geo-relationship network is more stable, and the bank loan effect of senior executives' geo-relationship is more obvious. In regions with low social capital and low social trust, people are more dependent on the network for transactions, and the bank loan effect of senior executives' geographical relations is more obvious.Under different bank characteristics, in regions with low degree of entry of foreign Banks, Banks generally have high acceptance of soft information transmitted by social networks, and the bank loan effect of senior executives' geographical relations is more obvious. In the year of monetary policy tightening,bank credit resources are relatively scarce, and it is more critical and urgent to convey information related to solvency to Banks. At this time, the bank loan effect of senior executives' geographical relations is more obvious. Under different industry characteristics, in industries not supported by industrial policies, enterprises do not enjoy the preferential distribution of financial resources. Instead, they rely on relational networks to obtain resources to a higher degree. In a depressed industry, it is generally difficult for enterprises to obtain bank loans. Enterprises with geographical relationship network are more likely to obtain loans through information transmission and reputation mortgage,and the bank loan effect of senior executives' geographical relationship is also more obvious.Finally, with regard to the economic consequences of senior executives' geographical relations, the results show that the bank loan effect of senior executives' geographical relations helps enterprises ease financing constraints and reduce investment shortage. Specifically, compared with the nonlocal senior executives, the enterprises of local senior executives have smaller financing constraints and higher investment efficiency. At the same time, Banks obtain more information about enterprises through the geo-relational network, and executives attach importance to their reputation in the geo-relational network to restrain their default behaviors. Therefore, this paper also finds that the bank debt default rate of enterprises where local executives work is lower. The results means that, in China, with the high degree of information asymmetry between enterprises and capital market and the absence of a sound rule of law system,senior executives' geographical relations can be used as an alternative informal system to ease the backward system's impediments to enterprise development and help enterprises obtain bank credit support to promote enterprise development.This paper has certain theoretical contribution and practical significance. In terms of theoretical contribution, first, it enriches the study of geographical relations and extends it from sociology and human geography to the field of enterprise finance. As an important part of China's relationship culture, this paper focuses on the important role of geographical relations in reducing transaction costs and facilitating the conclusion of transactions. Second, it broadens the way of measuring social network. Compared with a single study on the influence of a certain network factor on corporate behavior, the geographical network studied in this paper can cover alumni, market, blood relationship and other relationships. From the perspective of comprehensive social network, it focuses on the natural social network brought by the social identity attribute of senior executives. Thirdly, it deeply analyzes how the traditional informal alternative mechanism of geographical relationship alleviates the financing problem of enterprises in the absence of formal system.The practical significance of this paper lies in that it provides a certain reference for enterprises and policy makers. For enterprises, the construction of social network is conducive to the acquisition of resources, easing financing constraints, thus reducing insufficient investment and improving enterprise performance. For policy makers, accelerating the market-oriented reform and improving the level of marketization are conducive to improving enterprises' access to resources, thus promoting the economic development of the whole society. For both enterprises and policy makers, paying attention to the positive aspects of social networks and making rational use of them will help improve the social financing environment and contribute to the healthy development of the capital market.