Identifying the impact of bank competition on corporate shadow banking: Evidence from China

Abstract

The surge of corporate shadow banking activities in China has drawn much attention from academia and policymakers; yet very little is known about whether bank competition matters for corporate shadow banking activities. Using a large sample of Chinese listed non-financial enterprises (NFEs) over the period of 2003–2019, we identify the impact of bank competition on corporate shadow banking activities. We find a negative relation of bank competition with corporate shadow banking activities. Greater bank competition reduces corporate shadow banking activities by relaxing the firms’ financing constraints, alleviating information asymmetries, and improving their investment efficiency. Our results are robust to alternative metrics of core variables, controlling for regional characteristics, instrumental variable analysis, and the difference-in-differences estimation. Our findings suggest that a deregulation of bank entry, which increases bank competition, is an effective way to restrain corporate shadow banking activities without sacrificing economic growth.