The contraction of Chinese shadow banking and corporate investment behavior: Evidence from the background of the “New Rules on asset management”

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Employing the exogenous scenario of the “New Rules on Asset Management” in April 2018, this paper tries to explore the impact of the contraction of Chinese shadow banking on corporate investment behavior. This paper finds that the regulation leads to a 18.3% decrease in capital expenditure for firms relying on shadow banking system prior to the shock. Then, this paper tests three underlying mechanisms, which include the decrease of corporate borrowing, the increase of corporate financing constraints and the reduction of debt maturity. This paper also provides the empirical evidence that the implementation of the “New Rules on Asset Management” optimizes the allocation of capital across firms.