Credit risk contagion and firm investment efficiency: From the perspective of credit debt defaults

Abstract

Frequent credit debt defaults can constitute credit risk contagion causing systemic financial risk across the macroeconomy. In this paper, we find that credit risk contagion that occurs in a city or industry has a negative influence on the investment efficiency of firms within the scope, and this effect is amplified as the size of credit debt defaults grows. This conclusion is still robust after a series of tests. The mechanism analysis results show that credit risk contagion reduces firms' investment efficiency by affecting their bank lending, trade credit along the supply chain, credit allocation towards mortgage loans, and financial constraints. Furthermore, we find that private firms and firms located in regions with decentralized banking sectors are less affected by credit risk contagion, which validates the impact of firm ownership and regional banking sector concentration. Finally, we according to the test result of firm performance reveal that credit risk contagion increases the prudence of firm investment decisions, making this contraction of firm investment show a positive effect. This paper provides both theoretical support and policy insights for strengthening credit debt market regulation and preventing systemic financial risks.