Bank Loan Power Point

							               Formal vs Informal Finance:
                   Evidence from China
                            by
           Meghana Ayyagari, Asli Demirgus-Kunt,
                   Vojislav Maksimovic

                        Discussant
                      Bernard Yeung
                           Stern
                        Mar 2007
2011/1/4                                           1
      Interesting and important paper
          First point:
              China‟s use of informal financing is just
               as extensive as other developing
               countries, e.g., Brazil, Africa, East
               European countries, Africa, South Asian




2011/1/4                                               2
      Interesting and important paper
          Second point: among all firms (2002 data), or just
           private firms (not SOE, listed firms):
              Having bank financing is
                   positively and significantly associated with sales growth,
                    percent profits reinvested, and,
                    not related with productivity
              Self-financing (informal, family, other) is
                   Not related with sales growth,
                   Possibly negative related to reinvestment
                   Positively and significantly associated with productivity
                    growth
                         Productivity is (sales – total material costs)/L
          Control for
              Endogeneity in treatment effects
              City, size, firm type, age, competition
          Contribution – Use large scale data to show that formal
           (bank) financing helps growth and reinvestment

2011/1/4                                                                         3
      Comment on “endogeneity”
       Correlation between getting loans
        and future profitability, a classic
        problem
       Use a treatment effects model,
        Heckman correction (Inverse Mill‟s
        Ratio)




2011/1/4                                      4
      Endogeneity
    Need an instrument to predict getting bank loans but not
     correlated with future performance
          Collateral dummy as
            = 1 if has a loan and put in a collateral
            = 0 if has a loan, no collateral requirement,
                   no loan because can‟t put in a collateral,
                  do not apply for a loan b/c no collateral.

          The dummy captures the intersection of “requirement” for and “ability”
           to put in a collateral
               Logic:
                     “Collateral serves as a proxy for the firm‟s ability to post collateral. (so, can get a
                      bank loan).
                     Whether there was a collateral requirement or not is less likely to be correlated with
                      firm‟s growth and hence need not enter the 2nd stage. Thus collateral serves as the
                      identifying variable in our selection equation.”

               Curiosity
                     That some are granted a bank loan but not required a collateral are possibly due to
                      their expected future performance
                     But would that not make a part of the dummy correlated with future performance?
                     Feel weird to use ex post variable to as an ex ante “predictor”, but not very
                      successful to pinning down what is „wrong”
                     Why not use “tangibility” as an instrument?

2011/1/4                                                                                                 5
      Why the research is important?
          Does finance matter?
              Certainly
                 With finance, growth, no doubt

              Why interested? Allocation efficiency is the
               key
                   Reinterpret
                        With bank loan, experiences sales growth,
                         reinvest more, but, VA/L does not increase!
                             Meaning?

                        Self-financing, experiences little sales growth,
                         little increase in reinvestment, but VA/L grows!
                             Meaning?

                        Efficient/Inefficient formal external financing?!


2011/1/4                                                                     6
      Why banks are inefficient?
          Corporate governance
              Who own banks?
              Managers are by political appointment
                 Lack of prudent judiciary duties
                        Connected lending (short termism in the G)
                        Opaque system
                            corruption, NPL
                   Poor internal corporate governance
                        Credit officers want to lend!
                            My promotion vs. protecting other people‟s
                             money
                        Bank monitoring of borrower?
                            Go hard = face against connections




2011/1/4                                                                  7
      Push
          Examine the efficiency of the system
              Dig into the regions and cities and ask:
               where bank lending leads to better results?
                   Link the efficiency of bank financing with a
                    region/city‟s institutional environment?
                        Quality of the government
                        Quality of the regulations and supervision?
                        Quality of bank executives?
                           Bank‟s credit policies – equity requirement,

                            credit reports, etc
                           Loan officers‟ incentive/agency problem?




2011/1/4                                                                   8
      Still puzzled
          Recall the first point:
              China‟s use of informal financing is just as
               extensive as other developing countries, e.g.,
               Brazil, Africa, East European countries, Africa,
               South Asian
                 But, efficiency?

          Raise the puzzle: why is China growing so
           fast – even with its lousy capital markets?
              Higher savings?
              China‟s capital allocation is a bit more efficient,
               at least in some major cities?
                 Using location level variables to shed light?




2011/1/4                                                             9
      Conclude

          Interesting paper leading to
           interesting questions




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