On May 9, 2005, China Securities Regulatory Commission launched the split share reform. Finally, at the end of 2006, there were 1301 listed companies in the Shanghai and Shenzhen Stock Exchanges that had completed or entered the reform process, accounting for 97% of the reformed listed companies. The split share reform tasks were basically completed. The essence of the share reform is to give the small and medium-sized tradable shares a premium in the form of consideration and the controlling shareholders to gradually ban the non-tradable shares in accordance with the agreement to achieve full circulation. China’s stock market enters post-split-share reform. Therefore, the two types of principal-agent problems of listed companies in China were dominated by the second type of principal-agent problem between major shareholders and minority shareholders. Now there is a second type of principal-agent problem between major shareholders and minority shareholders and the first type of principal-agent problem between shareholders and managers. Therefore, this paper selects managers’ executive perquisites as the research object, discusses the first type of principal-agent problem between traditional shareholders and managers, and examines the corporate governance effects of bank loan on such principal-agent problems.

The executive perquisites are the monetary benefit of managers in the performance of their duties, including the enjoyment of luxury offices, possession of special planes or special vehicles, and catering and entertainment consumption. It harms the interests of shareholders and constitutes the first type of agency cost for managers. Focusing on how to reduce this type of principal-agent problem, domestic and foreign scholars carried out research [1] - [6] . However, these research results are mainly based on the developed markets of the United Kingdom and the United States. The research on the executive perquisites of managers in China is mainly based on the experience of developed markets from the perspective of ownership structure and manager incentives. Considering China’s special financial system with bank financing as the main body, this paper chooses bank loan as the corporate governance effect of creditor’s rights, and studies its impact on managers’ executive perquisites.

As a professional financial institution, banks have the advantage of solving the information asymmetry and moral hazard. They supervise the funds and management of the borrowing enterprises before, during and after the borrowing. However, the State-owned attribute of Chinese banks, through the market-oriented reform such as listing, whether it can give play to the corporate governance effect, there is a great deal of controversy. Cerqueiro et al. [7] and Lin et al. [8] use Swedish and US data to find that banks have a supervisory role on borrowing companies. Bailey et al. [9] , Qian and Yeung [10] used data from Chinese listed companies and found that China’s bank loan did not play a supervisory role for listed companies, even lowering the level of supervision of the entire financial market, including the equity market^. However, the authors found that these research papers were mainly used during the data sample period, 1999-2004, 1995-2009, 2007-2008, and 2003-2014. This may not take into account the achievements of the market-oriented reform of China’s commercial banks. Therefore, this paper examines whether the bank loan of listed companies in China has a restraining effect on the manager’s executive perquisites, and there have two contributions. First, this paper expands the research on the literature related to executive perquisites. Previous studies have focused on the discussion of the economic consequences of executive perquisites and the reduction of executive perquisites from the perspective of equity and manager incentives. According to the author’s inquiry, there is no discussion of manager’s executive perquisites from the perspective of creditor’s rights. This paper empirically tests the influence of bank loan on executive perquisites, which is a supplement to the literature research on executive perquisites. Second, it expands the related literature research on the agency cost of listed companies in China under the background of post-share split reform. Domestic and foreign scholars are very concerned about China’s split share reform, which is China’s unique institutional background. However, the principal-agent problem between the controlling shareholders and the small and medium shareholders in the governance of listed companies in China was generally existed before. After the split share reform, now it becomes a principal-agent problem between the controlling shareholder and the minority shareholders and the principal-agent problem between shareholders and managers. According to the author’s inquiry, the former scholars lack to consider the influence of the gradual dilution of the controlling shareholder’s equity. In this paper, the change of shareholding of controlling shareholders highlights the problem of principal-agent relationship between shareholders and managers, examines the difference in the proportion of shareholdings of controlling shareholders and the impact of bank loan on managers’ on executive perquisites.

China is a country with a transitional economy and has special institutional characteristics. It is significantly different from other developed countries in terms of marketization, ownership of financial institutions, degree of government regulation, and characteristics of financial systems. China is a financial system dominated by indirect financing of banks, and the corporate bond market has not yet developed. However, until China joined the WTO, China’s commercial banks showed the characteristics of regional division, business division, and serious government administrative intervention. After joining the WTO in 2001, China’s commercial banks have a five-year protection period. After 2006, China’s banking industry needs to be fully open to foreign banks. In order to meet the needs of the WTO competition rules, China’s commercial banks have accelerated the pace of reform. The Commercial Bank Management Law promulgated in 1995 requires commercial banks to strengthen credit risk management and gradually reduce bank loan issued to state-owned enterprises by government administrative orders. This law has achieved obvious results after implementation [11] . In addition to enacting laws, China has also adopted state-owned banks to inject capital, set up special regulatory agencies, implement new accounting standards, and reduce state-owned shares and other reform measures. Central Huijin Investment Co., Ltd., established in 2003, injects foreign exchange reserves into the four major state-owned commercial banks. In October 2003, it injected US$22.5 billion into the Bank of China. In December 2003, it injected US$20 billion into China Construction Bank. In April 2005, it injected RMB 15 billion into the Industrial and Commercial Bank of China. In November 2008, it injected 19 billion yuan into the Agricultural Bank of China. On April 25, 2003, the China Banking Regulatory Commission was established. It is a ministerial-level unit directly under the State Council. According to the authorization of the State Council, the Bank supervises and manages banks, financial asset management companies, trust and investment companies and other deposit-type financial institutions to maintain the legal and stable operation of the banking industry, so as to strengthen supervision and construction and enhance the development level of the industry. The new accounting standards were officially implemented on January 1, 2007, and the new accounting standards remain consistent with the definition of international accounting standards. It not only brings significant changes to the bank’s accounting, but also enhances the risk control, information disclosure, information systems and corporate governance of commercial banks. It allows foreign strategic investors or banking services companies to hold a small number of state-owned shares to get their help in capital, technology and management. For example, in 2005, Bank of America and Temasek Holdings invested US$3 billion and US$2.5 billion respectively, holding 9% and 6% of China Construction Bank. In particular, China’s commercial banks have listed and traded in the Hong Kong stock market and the mainland A-share market respectively, reducing the proportion of state-owned shares and becoming a public company. China Construction Bank listed on the Hong Kong Stock Exchange on October 27, 2005 and returned to A shares on September 25, 2007. On June 1 and July 5, 2006, Bank of China Co., Ltd. successfully listed on the Hong Kong Stock Exchange and the Shanghai Stock Exchange. On October 28, 2006, Industrial and Commercial Bank of China was listed on the Hong Kong Stock Exchange and the Shanghai Stock Exchange. On July 15 and 16, 2010, Agricultural Bank of China was listed on the Hong Kong Stock Exchange and the Shanghai Stock Exchange. Table 1 is the date of A-share listing of various commercial banks in China before the data deadline. Chang et al. (2014), Hsiao et al. (2015), Qian et al. (2015) and Dong et al. (2016) study Chinese banking reforms from cost and profitability, bank loan scores, Loan officer and credit manager loan accountability and the ease with which state-owned

property rights can obtain bank loan. They believe that the market-oriented reform of China’s banking industry has achieved remarkable success [12] [13] [14] [15] .

The split share is formed when China sets up the securities market. In order to attract investors to participate in stock trading, the listed major shareholders are mainly state-owned major shareholders, who promised that their shares are not in circulation. This stabilizes the investment confidence of small and medium-sized investors. However, with the development of the securities market, the drawbacks caused by the inability of major shareholder shares to flow are obvious. The main manifestation is that the major shareholder does not care about the value of the enterprise and even directly encroaches on the company’s interests. In order to solve the problem of split shareholding and maintain the long-term development of the stock market, China’s previous split share reforms did not solve the problem of the consideration of tradable shares and non-tradable shares, all of which ended in failure. In the 2005 split share reform plan of CSRC, the consideration between tradable shares and non-tradable shares was negotiated and agreed by the tradable shareholders of the listed companies and the non-tradable shareholders of the listed companies, which greatly protected the interests of the minority shareholders. By the end of 2006, most listed companies have implemented the split share reform. However, after the implementation of the split share reform, non-tradable shares of major shareholders holding more than 5% of the shares shall not exceed 5% of shares within 12 months and shall not exceed 10% of shares within 24 months. There are still quite a few shares of major shareholders in the lock-up period, which is often referred to as post-split-share reform. In the process of continuous circulation of major shareholder shares, on the one hand, the interests of major shareholders and minority shareholders are more consistent, reducing the agency cost of principal-principal between major and minority shareholders. On the other hand, the majority shareholder’s shares are converted from non-tradable shares to tradable shares, usually accompanied by a continuous decline in the shareholding ratio of major shareholders, which is conducive to large shareholders to diversify their investment risks. Figure 1 shows the trend of the largest shareholder’s share with the different period, and we can the mean, median, p25 or p75 are all decline over time which means that the decrease of the controlling shareholder’s shares, so the controlling shareholder’s supervision of the manager is reduced, and the principal-agent cost is more prominent.

As Jensen and Meckling [16] pointed out, when banks act as external entities to supervise borrowing companies, agency costs are reduced. Banks will manage the value of borrowing companies not only when they have defaulted. They will take advantage of their professional advantages, various information resources and management methods to implement supervision, or adjust bank loan terms and actively participate in corporate governance activities of enterprises [17] .

Cerqueiro et al. [7] and Lin et al. [8] obtained empirical support by using mature market data. For example, Cerqueiro et al. [7] used Swedish specific data to find that the design of bank loan collateral clauses supervised borrowers; Lin et al. [12] used US data to find that loan banks need a larger loan spread, higher loan fees, shorter loan terms, smaller loans Scale, more stringent loan agreements and more loan terms when there is greater control gains for borrowers.

In China’s capital market, there are widespread problems such as weak legal system, not strict market management and untimely information disclosure, which may affect the efficiency between Chinese banks and borrowing enterprises. The normal situation is that banks can punish borrowers with poor corporate governance by raising financing costs. However, due to the state-owned nature of Chinese banks, when corporate bankruptcy is interfered by local governments, it is possible that there is no correlation between the bank loan cost and the corporate governance quality of borrowing enterprises. Therefore, Bailey et al. (2011), Qian and Yeung (2015) and Yang Jiwei (2012) and Hua Middle East (2017) found that China’s bank loan can not play a corporate governance role [9] - [16] . For example, Bailey et al. [13] found that the event announcement effect of Chinese listed companies was significantly negative when they obtained bank loans, which means that companies with bank loans have worse performance in the future; Qian and Yeung [14] found that the listed companies with controlling shareholders’ high benefit expropriation continue to acquire new bank loan.

Jensen and Meckling [22] argue that executive perquisites are agency costs that undermine corporate value [18] . In the United States, the market reaction to declare or disclose executive perquisites is negative [1] [2] [3] . Luo et al. [5] used data from Chinese listed companies to show that executive perquisites are 10% more expensive in bank holding companies. After controlling factors such as the size of the company, the size of the board of directors, and the shareholding of the management, the listed companies with bank holdings have higher executive perquisites. Moreover, the ROA of the company with high executive perquisites is lower. The authors use the statistical analysis of this paper to obtain that the listed companies with high bank loan have lower executive perquisites than the listed companies with lower bank loan, and the listed companies with higher executive perquisites have lower financial performance, and the executive perquisites are reflected in agency costs¹.

As mentioned in the research background, China’s commercial banks have started market-oriented reforms since 2002. The market-oriented reform implements the responsibility system for loan officers and loan managers, and adopts the method of expert scoring system. The loan review system is continuously improved. For more than a decade, commercial banks have made great achievements. These achievements include the continuous decline in the non-performing loan ratio of commercial banks, the continuous enrichment of bank capital, the continuous expansion of asset scale and the continuous improvement of profitability. At the same time, China’s capital market has been continuously improved, especially the share-trading reform initiated at the end of 2005. The non-tradable shares of major shareholders have gradually turned into tradable shares, and the interests of major shareholders of listed companies are consistent with the value of listed companies. Thus, the combination of the reform of China’s banking system and the improvement of the capital market has changed the role of bank loan in China in corporate governance. Therefore, this paper believes that China’s commercial banks have gradually formed an independent shareholder corporate governance mechanism, aiming at maximizing profits, gradually getting rid of the government’s administrative intervention, and playing a market role in loan decision-making. And after the loan is issued, the bank has incentives to spend resources and costs to investigate and supervise the borrowing enterprise. The bank will take various measures to stop the damage to the company’s value, especially the increase of loan default.

Jensen’s [19] free cash flow hypothesis argues that debt financing is a hard constraint that can reduce the manager’s free volume ruling and constrain the manager’s interest encroachment behavior. As a professional financial institution, the bank can avoid the problem of “free rider”, supervise managers in a market-oriented system, restrain the interests of managers from benefit expropriation, and reduce the executive perquisites of business managers. Therefore, the first research hypothesis of this paper is proposed:

Research hypothesis H₁: Bank loan reduces the executive perquisites of enterprises.

According to Lin et al. [20] and Lin and Tan [21] , China’s state-owned enterprises not only bear social burdens such as social employment and social stability, but also undertake the strategic burden of economic transformation. Therefore, state-owned enterprises have soft budget constraints. Lin Yifu and others proposed the concept of the viability of state-owned enterprises. They believed that only by stripping these two kinds of burdens would it be possible to solve the soft budget constraints of state-owned enterprises in China, and state-owned enterprises could become real competitors in the market. China’s state-owned enterprises have started market-oriented reforms since the mid-1980s, but so far these two types of burdens, especially the strategic burden, have not yet been completed, and bank loan is difficult to play a supervisory role under the soft budget constraints of state-owned enterprises. On the contrary, non-state-owned enterprises are the participants of market competition. Under the background of market-oriented reform of commercial banks in China, they do not have the problem of soft budget constraints. They must obtain bank loans through their own advantages. Bank loan plays a supervisory role among non-state-owned enterprises. Therefore, the second research hypothesis of this paper is proposed:

Research hypothesis H₂: Compared with state-owned enterprises, bank loan has a more significant inhibitory effect on the executive perquisites of non-state-owned enterprises.

After China’s split-share reform, the non-tradable shares of the original major shareholders gradually turned into tradable shares, and the major shareholders gradually reduced the number of shares they held to disperse their own risks. At this time, the interests of the major shareholders and the interests of the company gradually become consistent, and with the decrease in the number of shares of the controlling shareholder, the incentives for the supervision of listed company managers are reduced, and the agency cost of managers has gradually become prominent. Therefore, the supervision effect of bank loan on the manager’s executive perquisites is more obvious. Therefore, the third research hypothesis of this paper is proposed:

Research hypothesis H₃: Compared with listed companies with high shareholding ratio of controlling shareholders, the bank loan of listed companies with low shareholding ratio of controlling shareholders has more obvious restraining effect on executive perquisites.

To get the empirical results, we do OLS regression which controls the year effect and industry effect to empirically test the impact of bank loan on executive perquisites, and further consider the impacts of different property rights and the proportion of the first largest shareholder holding and divide two sub-samples to test. Finally, we do a robustness test. Z-score is used as instrumental variable to deal with the endogeneity problems; considering the impact of liability and equity balance.

Different from the financial system based on direct financing such as Britain and the United States, Chinese financial system is based on indirect financing of banks. The corporate governance of listed companies in China may be different from Britain and the United States. Qian (1995) earlier proposed banks as external human-controlled plays an important role in corporate governance. After joining the WTO, China’s commercial banks have adopted a series of reform measures, and the market-oriented behavior of commercial banks has become more apparent. This paper selects the agent cost of manager’s executive perquisites as the research object, and examines the impact of bank loan on managers’ executive perquisites, so as to investigate whether the external human governance mechanism of commercial banks in China works. At the same time, considering the listed companies with different property rights in China, state-owned enterprises bear the strategic burden of solving social burdens such as employment and industrial adjustment [20] , so the different influences of bank loan on executive perquisites in state-owned listed companies and non-state-owned listed companies are investigated. Finally, in the context of post-split-share reform, the non-tradable shares held by the largest shareholder were continuously lifted, and the shareholding ratio of the largest shareholder continued to decline. This brings about the transformation of the principal-agent problem of listed companies in China. The previous type is mainly about agent problem between the major shareholder and the minority shareholder. But now it switches to the agent problem between the major shareholder and the minority shareholder, along with shareholders and managers. Therefore, the impact of the shareholding ratio of the largest shareholder on the relationship between bank loan and executive perquisites is examined.

Using the data of China’s listed companies in 2006-2017, the empirical results show that bank loan can significantly reduce the manager’s executive perquisites. Compared with state-owned enterprises, bank loan has stronger corporate governance effects in private enterprises, and significantly reduces managers’ executive perquisites. Compared with the listed companies with a high shareholding ratio of the largest shareholder, the corporate governance effect of bank loan with a low shareholding ratio of the largest shareholder is stronger, and the effect of reducing manager’s executive perquisites is stronger.

The research conclusions of this paper not only provide empirical evidence for the discussion of China’s commercial bank reform, but also determine the success of China’s commercial bank reform, existing a strong corporate governance effect. However, the governance effect of state-owned listed companies is not significant, and it is required to further deepen the reform of China’s commercial banks. For example, we should increase the proportion of foreign shareholdings in China’s commercial banks, or expand the business scope of foreign banks in China, and further reform the internal governance mechanism of commercial banks. It also provides empirical evidence for the reform of listed companies in China under the banking-based financial system. The empirical research of the predecessors rarely considers the bank as an external corporate governance mechanism. This paper provides sufficient evidence to support the corporate governance of commercial banks in China.

The authors declare no conflicts of interest regarding the publication of this paper.

Ye, Z.Q., Liu, L.Q., Wang, L.X., Ji, W.J. and Huang, W. (2019) The Impact of Bank Loan on Executive Perquisites under the Background of Post- Split-Share Reform. Modern Economy, 10, 1769-1789. https://doi.org/10.4236/me.2019.107114