Debt-financing,Monitoring By Large Creditor & Corporate Governance

This article study how debt-financing from banks affect outside corporate governance. Research on corporate governance was originated by Adam Smith three hundred years ago, in his works wealth of nations in 1776. After that, some scholars continued to develop the interest relationship caused by the separation of corporate ownership and control right. But the concept of corporate governance was proposed as a truly economic topic about in 1980s. and the related research reach the climax. Corporate governance was divided into inside and outside governance mechanism. This study will concentrated on debt-financing of from banks by enterprises and monitoring from debtor, which is belong to inside corporate governance. Debt-financing play the role of governance by means of clauses in the contract. There are much literatures relative to this topic. However, corporate governance research was triggered by the realities of governance failure and awfully performance of Chinese listed corporate. Investor force listed corporate to strengthen governance and performance. As the biggest debtors, banks have much more advantage on information, so the governance from banks will more effective than the small investors. When violation of contract occurs, banks can enhance its control to relate the cash flow and right of intervening the enterprise.But there are many obstacles to impede the governance of banks as big debtors, such as unaccomplishment of commercialization of state-owned banks and other banks, the lack of incentive mechanism to professional managers, law and regulation on enterprise bankruptcy. This is just difference to the theory and empirical study of debt-financing between foreign and today's China. Debt-financing just have soft constraints to Chinese listed corporates, which exhibited negative correlation between rate of debt and performance of corporates. We will verify our results with empirical analysis. The theoretical analysis and empirical study are based on incentive theory and econometric model. Our conclusion is that debt-financing play effective role in governance if existence of complete market mechanism and law environment.The organization of the paper is as fellow.Part 1 is theoretical review, focusing on debt government and big debtor's monitoring from western corporate government.Part 2 analyze the performance of debt-financing and big debtor controlling based on the framework of moral hazard model by TirolePart 3 introduce the two classical type of debt-financing, one is main banks government in Japan and German, and anther is market government in Great British and U.SPart 4 describe the realities of debt-financing in China. Our empirical study is based on the data from the listed corporate in Shanghai and Shenzhen securities exchange. The empirical results verify the hypothesis , that is, debt-financing just have soft constraints to Chinese listed corporates, which exhibited negative correlation between rate of debt and performance of corporates.Part 5 proposed some concluding remarks and policy recommendation. Emphasize focus on big debtor governance and related reform and policy to bank, and law constructing and debtor right protecting also should enhanced.