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Not all shadow banking is bad! Evidence from credit intermediation of non-financial Chinese firms

Author

Listed:
  • 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)

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.

Suggested Citation

  • Vinh Q. T. Dang & Isaac Otchere & Erin P. K. So & Isabel K. M. Yan, 2021. "Not all shadow banking is bad! Evidence from credit intermediation of non-financial Chinese firms," Review of Quantitative Finance and Accounting, Springer, vol. 57(4), pages 1437-1462, November.
    • Handle: RePEc:kap:rqfnac:v:57:y:2021:i:4:d:10.1007_s11156-021-00983-4
    DOI: 10.1007/s11156-021-00983-4
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    More about this item

    Keywords

    Credit intermediation; Shadow banking; Leverage; Investment; China; Political connection; Affiliation;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • P2 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies

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