“Debt Governance, Bank Capture, and Soft Budget Constraints: An Empirical Analysis of an Emerging Market” by Lihui TIAN
This paper examines the governance role of debt under soft budget constraints. Using a sample of modern firms listed on China's burgeoning stock market, we find that in contrast to standard finance theories, debt facilitates managerial exploitation of corporate wealth in an emerging market. An increase in bank loans increases the size of managerial perks by and free cash flows, or it decreases corporate value. The failure of debt governance is attributable to the institutional setting of China, where the government owns large banks and firms.