State Common Ownership and Bank Governance: Evidence from CEO Turnovers in China

Using hand-collected data of bank loans and CEO turnovers in China, we investigate whether common ownership compromises creditors' governance role when borrowers underperform. Unlike prior literature on the overall lack of bank monitoring on state-owned enterprises (SOEs) in China, we argue that such governance inefficiency exists only among the lending relationships where the bank and the firm are ultimately owned by the same government agency (i.e., state common ownership). The effects are greater for the firms with a board director from the lending bank, with ownership in the bank's shares, and with political connections. Overall, this paper revisits the functions of state-owned business groups in emerging markets.