Public–private partnership, cost of debt and accounting conservatism

Using a manually collected data set of Chinese publicly traded firms from 2010 to 2017, this study examines how public–private partnerships (PPP) affect the cost of debt and financial reporting. We argue that a firm gains political capital through a PPP and thus may access debt markets at a lower cost. Consistent with our expectation, we find that participants of PPP enjoy significantly lower bank loan interest rates than other firms. This is more pronounced for nonstate-owned enterprises, for firms without politically connected CEOs, and for loans from state-owned banks. However, these participants reduce their accounting conservatism, suggesting a substitution between financial reporting and political connections. Also, participating in PPP does not improve firms' financial performance. Thus, the lower interest rates are not justified by economic fundamentals or financial reporting quality. Overall, our study suggests that PPP distort state-owned banks' lending decisions and lower accounting conservatism, highlighting the potential cost of PPP to society.