Shadow banking business and firm risk-taking: Evidence from China

Abstract

This paper uses annual firm-level data from China, spanning 2003–2019, to explore the impact of the shadow banking business of non-financial firms on their risk-taking. The results show that the shadow banking business significantly increases firm risk-taking. Furthermore, the impact of firms’ shadow banking business on their risk-taking is particularly pronounced in firms with greater financing constraints, and poorer corporate governance and in times of loose monetary condition and severe financial stress. Moreover, increasing commercial credit, reducing main business performance, and eroding the quality of information disclosure are channels through which shadow banking affects firms’ risk-taking. Our findings suggest that improving external supervision and internal governance are vital for alleviating firms’ short-sighted involvement in shadow banking and the ensuing financial risks.