Deregulation on interest rate constraints has attracted great attention from regulators and the academic. The People’s Bank of China （PBOC） lifted the upper limit of loan interest rates in 2004 and the lower limit of loan interest rates in 2013. The market-oriented promotion of deregulation on interest rate constraints can enhance the degree of competition among the bank industry, improve the efficiency of bank supervision （Liu, et al., 2015; Ji, et al., 2015）, and effectively restrain the inefficient investment behavior caused by agency conflicts （Jin, et al., 2013; Yang, et al., 2017）. So, could the pricing mechanism of PBOC’s deregulation of interest rates conduct to the stock market and mitigate the stock price crash risk? Could it enhance the contingent governance of bank creditors’ rights （bank loan supervision） on the stock price crash risk? This paper employs a quasi-natural experiment on the cancellation of upper and lower limits of loan interest rates. By taking Chinese A-share listed companies from 1999 to 2015 as samples, we investigate the relation between deregulation on interest rate constraints and stock price crash risk. The empirical results show that deregulation on interest rate constraints contribute to reducing companies’ future stock price crash risk, especially in non-state-owned companies. Furthermore, the negative relationship between the governance path of bank creditors’ rights and stock price crash risk is strengthened, and this positive governance effect is more pronounced in long-term loans. What’s more, from the perspectives of bank cerdit willingness, corporate information conservatism and investment efficiency, it also supports the risk suppression effect of stock price crash by deregulating interest rate constraints. Our findings have theoretical contributions and practical implications: Firstly, we use a quasi-natural experiment to explore the important governance effect of deregulation on interest rate constraints on stock price crash risk. This not only overcomes the endogenous problem of the existing research on the governance of banks, but also proves that deregulation on interest rate constraints has a certain governance effect on the stability of the stock market, which brings the conduction governance effect of the interest rate debt market to the stock market, and also expands the relevant research on stock price crash risk. Secondly, this paper uses a difference-in-differences model to control the endogeneity. Combining with bank loans, it investigates the governance effect of deregulation on interest rate constraints on stock price crash risk, and gives more “clean” evidence that bank loan supervision can play an important role in the governance effect in the capital market, which supports the theoretical foundation of the debt governance hypothesis. Thirdly, we also find that deregulation on interest rate constraints can reduce the stock price crash risk in non-state-owned companies, which provides a valuable reference for improving the experience of non-state-owned listed companies’ weak risk-taking ability.
Deregulation on Interest Rate Constraints, Governance of Bank Creditors’ Rights and Stock Price Crash Risk: A Quasi-natural Experiment on the Cancellation of Upper and Lower Limits of Loan Interest Rates by PBOC
Journal of Finance and Economics Vol. 46, Issue 03, pp. 19 - 33 (2020) DOI:10.16538/j.cnki.jfe.2020.03.002
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Cite this article
Yan Xiang, Yao Youfu. Deregulation on Interest Rate Constraints, Governance of Bank Creditors’ Rights and Stock Price Crash Risk: A Quasi-natural Experiment on the Cancellation of Upper and Lower Limits of Loan Interest Rates by PBOC[J]. Journal of Finance and Economics, 2020, 46(3): 19-33.