This paper examines whether banking sector reforms and equity market development have made any noticeable impact on banks’ lending behavior and firms ’ corporate financing patterns in the People’s Republic of China. Based on data on publicly-listed firms, it has been found that banks ’ lending biases have been present especially toward large, less profitable firms, firms with greater State ownership, and old firms. Since most of these firms have been poorer performers than other firms, the results indicate the presence of a soft budget constraint. Moreover, this paper has also found that less profitable, large, and old firms have faced favorable lending bias after the initial public offerings (IPOs) on A-shares. The fact that these firms prefer bank loans over equity finance despite rising stock prices suggests that banks either provided favorable financing conditions which may be due to collusion, or lack of borrowers ’ incentive to diversify their financing sources. On the other hand, lending bias towards firms with greater State ownership was also present, but the bias has declined after the IPOs. These firms seem to have increased greater recourse to total equity finance by issuing more nonnegotiable shares than A-shares, probably to maintain management controls. adbi.org ADB Institut
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