Does State Ownership Really Matter in Determining Access to Bank Loans? Evidence from China's Partial Privatization

- State ownership does not necessarily lead to better access to bank loans in China.
- Unobservable differences across firms can drive the positive relationship.
- China's partial privatization can account for the positive relationship.

Prior studies have reported a positive relationship between state ownership and access to bank loans. Using a sample of 702,300 firm-year observations over the 1998-2007 period, we find consistent evidence that long-term debt ratios are significantly higher for firms with state ownership in the cross-section. However, once the unobservable difference across firms is controlled, the positive relationship becomes weaker. When the possible mechanical debt ratio reduction associated with the partial privatization in China is further controlled, the positive relationship between state ownership and access to bank loans completely disappears. Our findings suggest that state ownership does not necessarily lead to better access to bank loans in China, which is contrary to the common expectation.