Bank competition and corporate financial asset holdings

Abstract

This paper investigates how bank competition measured by the geographical distribution of bank branches impacts the financial asset holdings of nonfinancial firms. By using a sample of listed nonfinancial firms in China between 2007 and 2019, we find that intensified bank competition caused by the increase in the number of bank branches around firms significantly increases their noncash financial asset holdings, especially for the firms with a higher level of credit constraints or a greater degree of information asymmetry. The result implies that achieving higher yields is the underlying motive for firms to hold noncash financial assets. Moreover, the competition among non-state-owned banks shows a greater impact on corporate financial asset holdings, and the impact of bank competition on noncash financial asset holdings is more pronounced for non-state-owned firms. Our findings provide insight into the determinants of noncash financial asset holdings of firms in a transitional economy.