Shadow banking regulation and firm investment efficiency: Evidence from China's new regulation of capital management

Ziqin Yu, Xiang Xiao and Ge Ge

Research in International Business and Finance, 2025, vol. 77, issue PB

Abstract: Though China's shadow banking has compensated for the lack of formal financial development, its rapid expansion may magnify the risks of China's financial system. The New Regulation of Capital Management (NRCM) has been issued to regulate shadow banking in China. In this paper, with Chinese A-share listed firms from 2013 to 2021 as samples, we use the optimized generalized double difference approach to study the impact of shadow banking regulation on firm investment efficiency and its effect mechanism. We find that under the NRCM, shadow banking regulation, mainly by inhibiting firms' overinvestment, can substantially enhance firms' investment efficiency. Moreover, the mechanism test also finds that, by suppressing corporate financial asset investment and reducing corporate risk and agency costs, the NRCM can improve investment efficiency. Our study helps to take a more dialectical view of shadow banking regulatory policies and provides some implications for other developing countries and emerging economies.

Keywords: Shadow banking regulation; New Regulation of Capital Management; Investment efficiency; Overinvestment; Underinvestment (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:77:y:2025:i:pb:s0275531925001965

DOI: 10.1016/j.ribaf.2025.102940

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