The real effect of shadow banking regulation on corporate innovation: Evidence from conduit business

Siyi He, Qinglu Jin and Sirui Wu

Pacific-Basin Finance Journal, 2025, vol. 90, issue C

Abstract: As a crucial component of China's shadow banking system, conduit business is the practice whereby banks channel capital to borrowers through non-bank entities' asset management products (AMPs). Exploiting China's 2017 regulation that prohibited conduit business and adopting a difference-in-differences design, we show that strengthened regulation on shadow banking curbs both innovation inputs and outputs. The decrease in innovation inputs and outputs is mainly concentrated in expensed R&D and non-invention patents, suggesting that firms tactically adjust innovative activities. Further analyses show that such effects are more pronounced for firms that are already facing severe financial constraints and those with restricted access to market-led and government-led capital. Additionally, the strengthened regulation on shadow banking also reduces R&D expenditures for new projects and patents that do not comply with industrial policies to reduce failure risks. This study adds to the literature on shadow banking by offering its real effect on corporate innovation and provides implications regarding shadow banking regulation.

Keywords: Shadow banking; Conduit business; Corporate innovation; Financial constraint (search for similar items in EconPapers)
JEL-codes: G18 G21 G23 G28 G32 G38 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:90:y:2025:i:c:s0927538x24004086

DOI: 10.1016/j.pacfin.2024.102656

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