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 () and Isabel K. M. Yan
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Vinh Q. T. Dang: Macau University of Science and Technology
Isaac Otchere: Carleton University
Erin P. K. So: Hong Kong Baptist University
Isabel K. M. Yan: Department of Economics and Finance, City University of Hong Kong

Review of Quantitative Finance and Accounting, 2021, vol. 57, issue 4, No 10, 1437-1462

Abstract: 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.

Keywords: Credit intermediation; Shadow banking; Leverage; Investment; China; Political connection; Affiliation (search for similar items in EconPapers)
JEL-codes: G31 G32 P2 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s11156-021-00983-4

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