We examine stock price responses to announcements of bank loans in China's rapidly evolving economy, in which banks in general are unable to provide the certification role as 'insiders' to mitigate information asymmetry. Previous researchers find positive stock price reactions when U.S. borrowers obtain bank loans. However, we find significantly negative bank loan announcement effects for Chinese firms, particularly when the loan is intended to repay existing debt or originates with a local

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... branch. Furthermore, this negative effect is typically associated with borrowers who display more frequent related party transactions or subsequent poor corporate performance. Our evidence highlights the limited alternatives for raising capital in China and the political goals that the Chinese banking system serves. Abstract We examine stock price responses to announcements of bank loans in China's rapidly evolving economy, in which banks in general are unable to provide the certification role as 'insiders' to mitigate information asymmetry. Previous researchers find positive stock price reactions when U.S. borrowers obtain bank loans. However, we find significantly negative bank loan announcement effects for Chinese firms, particularly when the loan is intended to repay existing debt or originates with a local bank branch. Furthermore, this negative effect is typically associated with borrowers who display more frequent related party transactions or subsequent poor corporate performance. Our evidence highlights the limited alternatives for raising capital in China and the political goals that the Chinese banking system serves.