Borrower Opacity and Loan Performance: Evidence from China

We use survey data from the China Banking Regulatory Commission to construct a proxy for a firm’s opacity to examine its causes and influences. Our opacity proxy is positively associated with the distance between firms and banks, the geographic dispersion of business groups, and the size of the intra-group guarantee. Firms with higher opacity have a higher default probability particularly given a poor credit history or membership in a business group with low quality credit. Our evidence, which is robust to different model specifications, confirms that the borrower’s opacity can reduce the efficiency of bank monitoring. Our study indicates that loan officers have a good idea of the borrower’s opacity, and their professional opinions effectively reflect this perception.