| The theory of“Law and Finance”holds that formal institutions such as laws and financial markets have an important impact on the economic development of a country or region.The economic development tends to be better in the country or region where the financial market and legal protection is better.However,under the conditions of China's transitional economy,although the formal institutions such as financial markets and the legal system are not sound enough,China's economy has still achieved high-speed growth that attracts worldwide attention.The miracle of China's rapid economic development seems to be contrary to the“Law and Finance”theory.Since some scholars have proposed this“China mystery”,more and more scholars have begun to pay attention to the important role of the informal institutions.Many scholars believe that informal institutions such as relationships,trust,and reputation can help companies overcome the impediments of external environment and promote the growth of companies.Over the years,due to the lack of a well-developed financial system and effective legal protection in China,financing difficulties have become the primary factor that restricts the development of enterprises,especially the development of private enterprises.In the face of these institutional constraints,many companies have begun to rely on informal institutions such as relationships,trust,and reputation to expand their financing channels to promote the growth of companies.Taking costs of bank loans as an example,the paper examines the "collective punishment" caused by affiliated firms whose reputation is impaired(Who is punished by a regulatory agency)to other“innocent”members(companies that have not been punished by the regulatory agency)in the business group.Taking non-financial listed companies from 2003 to 2014 as a sample,this paper examines whether affiliated firms were punished by a regulatory agency,the cost of bank loans of other "innocen" members will be raised significantly and whether there are differences in the case of different property rights,financial markets and legal system.As a result,this paper find that when the reputation of a member is impaired,other“innocent”members in the business group will be punished:their costs of bank loans will be raised significantly by 0.04(37.56%)on average,and the bank loan cost increased more significantly in the group with high degree of reputational damage.This finding implies that the“collective punishment”caused by affiliated firms whose reputation is impaired does exist,and the greater the degree of reputation damage,the effect is stronger.The further tests have found that this effect is stronger in private enterprises,as well as in regions where the financial market and legal protection is better.It can be seen that apart from being influenced by individual factors,the external financing of affiliated firms is also influenced by the reputation of the group.Moreover,this effect is more pronounced in private companies and in institutions where the financial market and legal protection is better.This finding of this paper shows that under China's transitional economic conditions,t the reputation of the group as an informal institution has an important impact on the external financing of affiliated firms.Compared to state-owned enterprises,this informal institution is more important for private enterprises,and has a complementary relationship with formal institution such as financial markets and the legal system.At the same time,there was no change in related party transactions of the offending companies after their reputation was impaired.This means that other "innocent" members in the business group have not used the related party transactions to provide support to the affiliated firm whose reputation is impaired.The increase in the bank loan costs of other "innocent" member companies is not caused by“the insurance effect”of the business group,which further validates "the reputation" effect of the business group from the side. |
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