The Real Effects of Shadow Banking: Evidence from China

Xuan Tian (), Guoqian Tu () and Yichu Wang ()
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Xuan Tian: PBC School of Finance, Tsinghua University, Beijing 100083, China
Guoqian Tu: School of Accounting, Southwestern University of Finance and Economics, Chengdu 611130, China
Yichu Wang: Nottingham University Business School China, University of Nottingham Ningbo China, Ningbo 315100, China

Management Science, 2024, vol. 70, issue 12, 8556-8582

Abstract: We provide firm-level evidence on the real effects of shadow banking in terms of technological innovation. Firm-to-firm entrusted loans, the largest part of the shadow banking sector in China, enhance the borrowers’ innovation output. The effects are more prominent when the borrowers are subject to severer financial constraints, information asymmetry, and takeover exposures. A plausible underlying channel is capital reallocations from less productive but easily financed lender firms to more innovative but financially less privileged borrower firms. Our paper suggests that shadow banking helps correct bank credit misallocations and thus, serves as a second-best market design in financing the real economy.

Keywords: shadow banking; corporate innovation; capital reallocation (search for similar items in EconPapers)
Date: 2024
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