Internal Examiners Report on Yile Jiangs PhD Thesis

Essays on Banking, Corporate Capital Structure,

and the Real Economy
Chi-Wa Yuen
University of Hong Kong

Abstract

Correspondence: School of Economics and Finance, University of Hong Kong, Pokfulam, Hong
Kong.
[Phone: (852) 2859-1051; Fax: (852) 2548-1152; E-Mail: cwyuen@hku.hk; Website:
www.sef.hku.hk/cwyuen]

Chi-Wa Yuen

1
1.1

Section A.3: Questions for inclusion in the oral exam

Essay 1: Bank Health and Corporate Debt Structure
In principle, the rm can meet any unsatised credit demand due to limited bank
leverage (during, say, periods of nancial crisis) by issuing corporate debt or equity.
You choose to focus on the substitution between bank loans and corporate bonds, and
ignore the rms equity issue as an option. How strongly do your results depend on
this simplication?
Is equity data available to conduct a more general analysis that incorporates this other
form of external nancing? If so, why didnt you do it?
What is the evidence provided by the existing literature, if any, about the substitution
between bank loans (demand for bank credit) and corporate equity on the one hand
and that between (the supplies of) corporate bonds and stocks on the other?

1.2

Essay 2: The Cyclicality of Debt and Equity Finance: Evidence from China
Most of the results in this essay reveal correlations, rather than causal relations, between real GDP on the one hand and corporate debt and equity separately on the
other. Those obtained from panel regression are based on the presumption that real
GDP (and some other variables such as Tobins Q) as exogenous and debt and equity
as endogenous. But, at least at the aggregate level, one could conceive the possibility
of reverse causation viz., aggregate debt and aggregate equity causingreal GDP.
Could you perform some kind of causality tests (e.g., Granger) to examine the
direction of causation or their lead-lag relations?
If data availabilty were not a problem, how would you go about constructing a
structural econometric model to estimate their causal relations?
Firms are classied according to their sizes. What are the economic intution and
mechanism(s) behind the role of rm size for these cyclical relations?
Instead of classifying rms according to size, one could also classify them according
to industry (e.g., non-nancial vs. nancial) and ownership (e.g., SOEs vs. private
enterprises).
Why didnt you try these alternative classications?
Could you speculate how the cyclical patterns of debt and equity would vary
across industries and across forms of ownership?
Do you expect any business-cycle asymmetry between upturns (recovery) and
downturns (recession) in such patterns?

Internal Examiners Report on Yile Jiangs PhD Thesis

Chi-Wa Yuen

2
2.1

Section B: Report on thesis

Quality of research

Yile has completed a decent thesis on the empirical relations among bank lending, rm
nancing, and the macroeconomy. Overall it demonstrates Yiles command of the literature
and empirical techniques, as well as her ability to execute and express her ideas clearly and
to interpret her ndings sensibly. The following is an elaboration for each of the two essays.
2.1.1

Essay 1: Bank Health and Corporate Debt Structure

The rst essay oers a new perspective in thinking about the relation between bank lending
and the rms issue of corporate bonds.. Instead of asking how a rms demand for bank
credit interacts with its supply of bonds (as has widely been explored in the literature), Yile
looks at how the supply of bank credit by the rms relationship bank what she calls bank
health inuences its decision to issue bonds. Applying logit regression to US data, she
nds unsurprisingly a negative relation between bank leverage and the likelihood of issuance
of corporate bonds both at the relationship-bank level and the banking-industry level. She
also compares this relation as well as the design of loan and bond contracts between normal
times and periods of nancial crisis.
The main contributions of this essay lie in providing a measure of bank health, establishing links between rms and their relationship banks, and improving our understanding
about how the supply of bank credit aects the rms debt choices (i.e., the balance between
bank loans and corporate bonds)
2.1.2

Essay 2: The Cyclicality of Debt and Equity Finance: Evidence from

China

The second essay asks how corporate debt and equity in China vary over its business cycle.
Yile addresses this quesion by using both correlation analysis and panel regressions for rms
of dierent sizes, compares her results with those in the US, and tries to tell stories to justify
the dierences between the two countries.
Her empirical methodology basically follows those commonly adopted in the literature. Her contributions here include the construction of relevant data for the Chinese
economy as well as lling 2 missing gaps in China research viz., examination of equity
cyclicality and application of conventional techniques (not adopted by researchers in Mainland China) to examine leverage cyclicality.

2.2

Recommendations for revision

Try to address my questions in Section A.3 as far as possible by providing at least
speculative answers using economic intuition and casual observations.

Internal Examiners Report on Yile Jiangs PhD Thesis

Chi-Wa Yuen

2.3
2.3.1

Suggestions for future research

Essay 1: Bank Health and Corporate Debt Structure
Examine how the inclusion of equity issue (or share repurchase) as an option of external
nancing to meet the rms unsatised credit demand due to limited bank leverage
(during, say, periods of nancial crisis) would aect quantitatively the substitution
between (the supply of) bank loans and corporate bonds.
Examine how bank health would aect the composition of the rms external nancing
viz., among (the supplies of) bank loans, bonds, and stocks.
Examine how the inclusion of internal nancing (retained earnings) would change the
answers to the questions above.

2.3.2

Essay 2: The Cyclicality of Debt and Equity Finance: Evidence from

China
Address my last question in Section A.3.

Internal Examiners Report on Yile Jiangs PhD Thesis