Not all shadow banking is bad! Evidence from credit intermediation of non-financial Chinese firms

Vinh Q.T. Dang, Isaac Otchere, Erin P K SO*, Isabel K.M. Yan

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


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 languageEnglish
Pages (from-to)1437-1462
Number of pages26
JournalReview of Quantitative Finance and Accounting
Issue number4
Early online date13 Apr 2021
Publication statusPublished - 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


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