Abstract/Summary

In the developed markets, good earnings quality could effectively reduce information asymmetries in loan syndication. However, our results shows that earnings quality plays a limited role in loan syndications in a market where the state has dominant power. Examining a sample of syndicated loans to Chinese corporate borrowers, we find that state ownership overrides the signaling role of earnings quality in alleviating the problems of adverse selection and moral hazard, as it provides an implicit guarantee of the loan repayment. Nonetheless, interestingly, firms with better earnings quality, regardless of their state ownership, are rewarded with more favorable loan price. Such an overriding role of state-ownership over syndicated loan contracting prevails even with the presence of foreign lender participation, which suggests that foreign banks seem to have followed the conventional wisdom that ‘when in Rome, do as the Romans do’.