Credit mismatch and non-financial firms’ shadow banking activities —evidence based on entrusted loan activities

Abstract

When governments opt for financial repression policies, credit mismatch becomes more prevalent. This may lead some non-financial firms with excessive loans to financialize their operations and undertake shadow banking activities, that is, entrusted loans. Using all listed Chinese firm's financial data and entrusted loans data from 2008 to 2016, this study investigates the impact of credit mismatch on firm's entrusted loans. Results show that, the more credit mismatch, the higher the tendency and the size of firm's entrusted loans. Above the relationship is more significant when under some certain backgrounds, such as a higher degree of government intervention, tighter monetary policy as well as lack of investment opportunities, and state-owned enterprises. Further analysis reveals that a firm's engagement in entrusted loans can harm its main business activities. This study intends to enhance our understanding of the shadow banking activities as means of funds reallocation within China's financial system.

The impact of shadow banking on nonfinancial firms listed on the Ho Chi Minh Stock Exchange (HOSE) – Evidence from Vietnam

“…Hypothesis H2a is accepted with Shadow proxy. Our findings are consistent with most of the studies in the literature (e.g., Bai et al, 2020;Si & Li, 2022).…”

“…Our findings imply that the expansion of shadow banking activities will worsen the firm's performance. Hypothesis H1a is supported by previous research (Bai et al, 2020;Tao et al, 2022). The theoretical foundation for this hypothesis is based on the concept of regulatory arbitrage, which argues that firms may want to participate in shadow banking operations to avoid regulatory limits on ordinary banking activity.…”

“…One of the main risks associated with shadow banks is that they may be more prone to systemic risk and financial instability. This can create uncertainty and volatility in financial markets, which can have a negative impact on corporate performance (Bai et al, 2020;Hsu & Moroz, 2010;Si & Li, 2022). Shadow banks may also be less transparent than traditional banks, making it more difficult for corporations to assess the risks associated with their lending practices.…”

“…Nonfinancial firms may take on greater risk as they seek better profits and engage in more speculative activities as a result of this. Several studies also have provided empirical evidence to support the negative impact of shadow banking on a firm's risk-taking (Bai et al, 2020;Si & Li, 2022).…”