Banking Market Reform, Earning Quality And Debt Contracting

Bank financing has always been an important source of external funding forcorporation. Accounting information, what is more, earning information plays a keyrole in bank loan contracts. Unlike equity cost, loan contracts include not only priceterms-interest rate (direct loan cost), but also have many non-price terms, such asmaturity, collateral requirements, these non-price terms is loan indirect cost. All of theprice-terms and non-price terms are corporation’s loan cost. Under the specificbackground of China’s bank reformation from2003, this paper attempts to study theeffect of earning quality on bank loan contracting, and test the effect of bankreformation from2003.This paper does an empirical research by using listed companies on the Chinesestock market from2000to2009. The basic unit of the empirical analysis is a loan,which contains interest rate, maturity, collateral at the same time. We use Jones Modelas earning quality’s proxy to test earning quality on the design of loan contracts(include interest rate, maturity, collateral). We divided the sample data into threegroups: the first one group is the all-sample group, the second one is the pre-2003sample, and the third one is the post-2003sample. The research conclusions are that:after the year of2003, ban can recognize borrower’s earning quality and affect thedesign of loan contracting. Poorer earning quality has significantly higher interest rate,shorter maturities, and higher likelihood of being secured. We do not find the sameconclusion in the first group and the second group. This indicates that earning qualityaffects the design of loan contracting, and the2003-bank reformation has partly beensuccess.