In China, state-owned companies actually get more scared and play it safer when they borrow from state-owned banks.
Common wisdom suggests that 'zombie' firms with government ties take reckless risks because they expect bailouts. This study finds the opposite: when the bank and borrower share a government owner, insiders avoid even profitable risks to play it safe, leading to stagnation rather than reckless expansion.
Common State Ownership, Bank Monitoring and Borrower Risk-Taking in China
SSRN · 6461027
This study examines how common state ownership—where banks and borrowers share the same government owner—and bank monitoring influence borrower risk-taking in China. Using a unique hand-collected dataset of bank loans and ownership structures, we find that common state ownership is significantly associated with reduced borrower risk-taking. This effect is shaped by bank monitoring effectiveness, proxied by loan intensity, the guaranteed loan ratio, and the share of short-term loans. The negative