Distance, information and bank lending in China

This study aims to examine whether branch-firm distance, branch-headquarter distance and local bank competition affect bank lending in China. By incorporating loan transactions and geographic information of banks and firms, this study applies a three-way regression analysis among listed firms in China. Both branch-firm and branch-headquarter distances are found significantly decreasing loan amount, by increasing information cost and cutting off soft information. The demand for soft information reduces loan credit, which is more salient among samples of Big 4 banks. The above pattern is also found more apparent for inter-province loans, where branch is collecting information at a relatively higher cost and lack of soft information. Additionally, distant loans are also found vulnerable to credit reduction of banks. This study also finds that the bank branch facing greater local competition would issue greater amount of loans to borrowing firms. The major academic contribution of this paper is the innovative measure of soft information demand as the distance between bank branch and its headquarter, which highlights the study on soft information and helps clarify issues on bank loans in China.