Bank-Enterprise’s Relation, Debt Financing And Inefficient Investment

With china’s reform and opening-up, Private Enterprises who have weaker foundations and overcome these problems and its proportion of our national economy is Increasing year by year. According to the survey of Chamber of Commerce, in 2013, the contribution of Private Enterprises to Gross Domestic Products is up to 60%. The private economy has become the most active national economy growth. While under China’s current financial system, state-owned enterprises are close links with the government. This makes banks more willing to lend money to state-owned enterprises and there is a certain credit discrimination against private enterprises in banks. Moreover Banks prefer to lend money to the state-owned enterprises who have poor performance, nor to lend money to private enterprises who have good performance but need funds urgently. This has resulted in difficulties of private enterprises financing. According to the survey of Chamber of Commerce which is published in the< Private Economic Blue Book:China Private Economy Development Report>, the difficulties of private enterprises financing has become one of the problems restricting the development of the private economy.In China, relationships are a very important. Relationships play an important role in accessing to social resources which is scarce. Relational Financing came to being. With the initial success that bank reform has achieved and gradually improving of the market degree, the impact of government on bank lending decreases. While the impact of relationship between banks and enterprises on bank lending is still large. So this paper will examine the impact of the relationship between banks and enterprises on corporate debt financing and examine how the relationship between banks and enterprises affect investment efficiency through debt financing.Firstly, this paper carding the literatures which is about debt financing and inefficient investment. The theoretical basis of this paper is Asymmetric Information Theory and Principal-agent Theory. Since the current economic environment, compared with private enterprises, state-owned enterprises have a huge advantage in financing and they are not comparable. This paper combines both normative and empirical research methods to make a research on how the relationship between banks and enterprises affect investment efficiency through debt financing based on the experimental data from 2008-2009 of Chinese Shanghai and Shenzhen listed private companies. This paper analyzes the current development of private enterprises, including the overall development, "financing difficulties", as well as private enterprises investment dilemma. Using Asymmetric Information Theory and Principal-agent Theory, explain Issues in corporate financing and investment. In the empirical research, examine the impact of personnel association and equity relation on debt financing, the impact of debt financing on inefficient investment and how the relationship between banks and enterprises affect investment efficiency through debt financing in a logical order.According to the study, we drew the following conclusions:(1)Both personnel association and equity relation can significantly increase the debt financing level of private enterprises. This increasing mainly reflects in the increase of short-term borrowings. In other words, both type of relationships between banks and enterprises can significantly improve the proportion of short-term borrowings of private enterprises, while the impact on the proportion of long-term borrowings of the enterprise is not significant. (2)In general, debt financing increasing the company’s inefficient investment. Specifically, debt financing exacerbate excessive investment. On the other hand, the under investment of private enterprise mostly due to the lack of funds, so debt financing ease the under investment through improving the situation of lack of funds. (3)Both personnel association and equity relation can significantly ease the positive effect of debt financing for inefficient investment. For excessive investment equity relation can improve information asymmetry and agency problems and ease the positive effect of debt financing for excessive investment. For under investment, personnel association ease the negative effect of debt financing for under investment. Finally, this paper proposes policy recommendations from three aspects-Enterprises, banks and market reform.