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| Rollover Restrictions and Corporate Innovation |
| YE Yongwei, LI Zengfu
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School of Public Economics and Management, Shanghai University of Finance and Economics;
School of Economics and Management, South China Normal University |
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Abstract Innovation allows firms to increase their value and cultivate new competitive advantages. In the Chinese financial system, banks are important institutions that provide firms with high-quality credit and services. They are responsible for supporting and sustaining a firm's transformation. However, due to financial repression, Chinese firms have begun rolling over loans to support long-term innovation. Studies have suggested that the use of short-term loans to support long-term investment has become a sub-optimal choice. However, in recent years, many Chinese firms have faced liquidity risks because banks have begun to refuse to rollover loans or to demand early repayment. Few studies have explored whether loan withdrawal or loan suspension affects a firm's innovation. Therefore, this paper explores the impact of loan rollover restrictions on the firm's innovation.
Loan rollover restrictions generally reduce the firm's access to short-term bank loans. At the same time, loan rollover restrictions increase banks' caution and sensitivity to risks, and the banks issue less long-term loans to avert risk. Therefore, loan rollover restrictions may inhibit the firm's innovation. This increase in caution causes banks to strengthen the firm's debt restraints, improving corporate governance. Thus, loan rollover restrictions resolve the agency problem in the firm's innovation process and improve the efficiency of capital allocation, which is conducive to innovation.
China passed the Guideline for Loan Risk Classification law in 2007, prohibiting the practice of “borrowing for repaying.” The law stipulates that when a firm borrows a new loan to repay the due loan, the new loan is classified as a bank's non-performing loan. The exogenous event provided this study with a good quasi-natural environment to research the impact of loan rollover restrictions on a firm's innovation. This study uses the difference-in-differences method to conduct its research. The regression results showed that loan rollover restrictions significantly inhibit a firm's innovation. The conclusion was still valid after a series of robustness tests. Further research found that the policy's effects vary greatly depending on the type of patent. Firms' invention patents were declined more often than non-invention patents.
This paper's main contributions are as follows: First, it advances the research on the economic consequences of loan rollover policy reform. Studies have not conducted detailed research on the policy reform's impact on the firm's innovation. This paper examines the impact of loan rollover restrictions on the innovation process, revealing the microeconomic consequences of loan rollover policy reform. Second, this paper advances the literature on corporate innovation. In recent years, studies have suggested that increased tolerance for corporate failures allows firms to be more innovative. This study adopts the bank's perspective to show that corporate innovation can only be improved by increasing the tolerance for corporate failures and non-performing loans and relaxing the loan rollover restrictions for high-performing companies. This finding is an extension of the initial hypothesis. Third, the study has important significance for financial system reform that could improve firms overall. This paper shows that loan rollover restrictions weaken the bank credit's positive effect on the firm's innovation. Therefore, the relevant departments need to broaden corporate financing channels and relax loan rollover restrictions for high-performing enterprises to avert the restriction's negative consequences and support the firm's innovation process.
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Received: 10 September 2018
Published: 02 December 2020
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