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Proximity, information, and loan pricing in internal capital markets: Evidence from China

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  • Qian, Xuesong
  • Kong, Dongmin
  • Du, Li

Abstract

We examine the effect of geographic proximity on loan pricing in internal capital markets by focusing on the role of information. Using a hand-collected dataset on entrusted loans within business groups in China, we find that loan prices are positively associated with the distance between borrowers and lenders, which suggests that a reduction in distance facilitates the monitoring of borrowers and gathering of soft information by lenders. Results remain unchanged after controlling for potential endogeneity. Our findings are further pronounced (1) for lenders with headquarters that are time constrained; (2) during the early years of our sample period, when the Internet and transportation infrastructure were less developed; and (3) for borrowers for whom information uncertainty is likely to be substantial and soft information is likely to be valuable, such as young borrowers and borrowers in different industries to lenders. This paper sheds new light on the role of geographic proximity in intra-group loans within business groups.

Suggested Citation

  • Qian, Xuesong & Kong, Dongmin & Du, Li, 2019. "Proximity, information, and loan pricing in internal capital markets: Evidence from China," China Economic Review, Elsevier, vol. 54(C), pages 434-456.
    • Handle: RePEc:eee:chieco:v:54:y:2019:i:c:p:434-456
    DOI: 10.1016/j.chieco.2019.02.005
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    More about this item

    Keywords

    Proximity; Intra-group loans; Internal capital markets; Loan pricing; Information asymmetry;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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