Earnings quality, state ownership and syndicated loan: evidence from China

This study examines whether and how the earnings quality and state-ownership of Chinese corporate borrowers affect the features of syndicated loans, in terms of loan spread, maturity, syndication structure and the participation of foreign lenders. Using sample syndicated loan facilities issued to Chinese public firms over 1998-2016, we show novel and robust evidence that earnings quality is negatively associated with loan spread and state-ownership is positively associated with loan maturity, the concentration of syndication structure and the participation of foreign lenders as lead arrangers. In contrast to evidence on bilateral loans, we find state-ownership does not affect syndicated loan prices. We also show that compared with domestic lenders, foreign lenders rely more heavily on ‘hard’ information. They charge lower spread, than domestic lenders, from Chinese borrowers with higher earnings quality and they are more willing to lead loan syndications for state-owned borrowers. Overall, our findings are consistent with the conjecture that earnings quality plays an important role in alleviating the asymmetric information issue and state-ownership serves as a favorable signal for implicit guarantee for repayment in syndicated loan market in China