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 journalJournal articlepeer-review

    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 languageEnglish
    Pages (from-to)1437-1462
    Number of pages26
    JournalReview of Quantitative Finance and Accounting
    Volume57
    Issue number4
    Early online date13 Apr 2021
    DOIs
    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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