Abstract
Using data from 2009 to 2016 data, we investigate the relation between leverage and investment in listed firms in China against the backdrop of rising shadow banking. We examine a component of Chinese shadow banking specifically related to firm financing: entrusted loans that arise through credit intermediation among non-financial listed firms. We identify credit intermediation by estimating the elasticity of liquid financial assets to financial liabilities. Our fixed-effect instrumental variable estimation shows that credit intermediation among Chinese firms positively affects firm investment efficiency. In particular, as firms lend to other affiliated firms, the enhanced lender-borrower interest alignment alleviates debt overhang problem that firms must otherwise fully endure in industries where there is no active credit intermediation. For private firms, affiliation with lending state-owned enterprises is a substitute for political connection, as both forge stronger interest alignment and reduce debt overhang. We observe a similar outcome for state-owned enterprises in industries where credit intermediation is performed by either private or state firms. Moreover, credit intermediation exerts some disciplinary effects on the investment of low-performance firms. Our findings are robust to different measures of firm performance.
Original language | English |
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Pages (from-to) | 1437-1462 |
Number of pages | 26 |
Journal | Review of Quantitative Finance and Accounting |
Volume | 57 |
Issue number | 4 |
Early online date | 13 Apr 2021 |
DOIs | |
Publication status | Published - Nov 2021 |
Scopus Subject Areas
- Accounting
- Business, Management and Accounting(all)
- Finance
User-Defined Keywords
- Affiliation
- China
- Credit intermediation
- Investment
- Leverage
- Political connection
- Shadow banking