Banks' Competition And Bank Monitoring

Although in recent years, the size of China's stock market and bond market has been expanding, but still cannot shake the status of bank loans in financing for the enterprises. In 2015, only RMB loans accounted for 73% of the community on a total financing of non-financial institutions, reached to the highest level in nearly nine years, which also determines the important position in bank lending channel for monetary policy transmission.Theoretically, bank loans are generally both play the role of "financing function" and "oversight function". On the one hand, when companies has a funding gap, they can apply for bank loan assistance to address the funding gap; on the other hand, the bank perform its oversight function to ensure the safety of lending assets throughout the relationship existence. As long as there is a loan, "financing function" will be achieved, but the "oversight function" maybe absent sometimes. In the pre-review stage, companies submit the bank loan application materials, then banks audit companies' qualification according to its own criteria, to determine whether offer the business loans. After offer loans, the banks need to take care of the important changes that the enterprise take, to determine whether these changes will affect the security of the loan, or even recover the loan in advance or, if necessary, to discontinue loans.When the oversight function operates effectively, the banks will offer loans to the enterprises that operate will. Due to the available resources increase, such enterprises' earnings will also increase largely, according to Gordon model this can speculate enterprises' equity values. When the market learn those news, this positive feedback will be directly reflected in the stock price movements, stocks prices of the debtor will has a positive abnormal returns over a period of time around the announcement. Conversely, if the bank loan supervision function is missing, the valuable resource will not flow to the most valuable place, which actually increases the risk that the loan assets faced, bank loans at this time will only accelerate resource damage, the abnormal stock price fluctuations was negative near the debt announcement time. Therefore, we can analyze the effects of the supervisory role of bank loans through observing the abnormal stock price volatility around the announcement time. On the relationship between lending and abnormal stock price variation, the foreign scholars firstly do a number of studies and found that, in a mature capital market the abnormal fluctuations usually is positive. In China, scholars use the same approaches to study the market reaction to bank loans announcements, but some researchers found the abnormal returns are positive, and some scholars found that abnormal returns are negative, and conclusions no less coherent to foreign markets. This indicates that bank lending in the mature market, generally have a supervisory role, and in transition countries' market, bank loans don't play its oversight role of the borrower's business.About this phenomenon, some scholars believe this is because banks are mostly state-owned, combined with bank loans play an important role in the monetary policy transmission, which provides a convenient for government intervention in bank operation. Well, according to SCP theoretical analysis, we can speculate that the behavior of bank supervision and external competitive environment will also have an important impact on the banks'operation. Based on existing literature study, we did find evidence of competitions affect loan review and oversight, but few scholars analyzed from the perspective of the loan announcement. In order to figure out what kind of relationship exists between abnormal returns and loans banking competition, what problem this relationship will illustrates, this paper will study it from the angle of announcement effects.Firstly, this paper select the bank loans bulletins announced during 2009-2014, and finally selected 115 research samples according to a certain selection criteria. This paper defines the time 10 days before and after announcement day as the events window, and then uses the market model to calculate the abnormal returns. Through the T test and Wilcoxon test, I find that the abnormal returns significantly less than 0, this reflect bank loans don't supervise the debtors effectively. Then I do the group tests, the results of group tests indicate that the average day abnormal return of low competition group significantly big than the high competition group when the time is 3 days before the announcement. The regression result also proves the positive relationship between abnormal return and banks competition. Although I find there is positive relationship between abnormal return and banks competition, but this result is robust or not? In order to confirm this doubt, I used other two models to calculate those steps again, and find there is no different from the first results. I also select the samples again, and found the conclusion also exists. The innovation of this paper is that it studies the relationship between bank competition and debtors supervise from a new perspective.