Litigation,Political Relations And Bank Loan Contract

An enterprise is a combination of a series of contracts.Bank loan contract is an extremely important contract,and its standard and completeness determine the risk of creditor(bank)and debtor(enterprise).Since Smith and Warner formally put forward the debt contract theory,the research on debt contract mainly focuses on the influence of corporate characteristics and internal governance on debt contract.In recent years,with the rise of "law and finance",legal litigation,which is an external governance mechanism,has attracted more and more attention from domestic and foreign scholars.At the same time,with the continuous progress of China’s economic market-oriented reform,the continuous improvement of the rule of law environment and the increasing legal awareness of all participants in economic activities,the number of enterprises involved in litigation has increased significantly.Litigation risk has gradually become one of the important external uncertainties affecting the development of the company.Therefore,this paper will study the impact of litigation as an external governance mechanism on bank loan contracts.However,China’s legal system and financial system are at a relatively low level of development.Therefore,many companies use their own reputation and "Guanxi" as an alternative mechanism to the legal system to ensure the operation of financial transactions.As a traditional society with "official standard",political relations are in an absolutely strong position in the informal mechanism.Therefore,this paper explores how the relationship between legal action and bank loan contract changes with the intervention of political relations,so as to find an effective way for enterprises to prevent legal risks.At the same time,by presenting the results of the influence of legal litigation and political relations on bank loan contracts,it provides a reference for policy makers to think about how to balance the formal mechanism and the informal mechanism to achieve the maximum benefit.Firstly,this paper systematically sorted out the literature related to legal litigation,political relations and bank loan contracts,so as to give researchers a systematic understanding of relevant research,and at the same time,provide a theoretical basis for this research.Secondly,this paper takes a-share listed private enterprises from 2010 to 2017 as samples to empirically study the impact of legal litigation and political relations on bank loan contracts,and the impact of legal litigation on bank loan contracts under the regulation of political relations.The results show that:(1)corporate litigation has a negative impact on bank loan contract and this impact increases with the increase of litigation intensity;(2)the political relationship of the company’s executives has a positive impact on the bank loan contract,which increases with the strength of the political relationship;(3)the political relationship of senior executives will reduce the negative impact of corporate lawsuits on bank loan contracts,and this effect will increase with the strength of political relationship.Different from previous studies,this paper combines formal mechanism and informal mechanism,which on the one hand shows that the informal mechanism of establishing political relations can be an effective way for enterprises to prevent legal risks,and on the other hand provides a reference for policy makers to achieve the maximum benefit through the balance between formal mechanism and informal mechanism.