LI Zhisheng;JIN Ling;KONG Dongmin
As China’s economy is transitioning from high-speed growth to high-quality growth, it is very important to improve credit resource allocation efficiency at the macro level and fund utilization efficiency at the micro level. Due to soft budget constraints and government concerns about economic instability, a large quantity of credit resources flow into zombie firms and weak firms to ensure stable employment and local tax revenue. The privileging of zombie firms distorts credit allocation and crowds out credit to healthier and more productive firms. This structural problem of credit resource allocation seriously hinders the process of China’s high-quality development. In contrast to other developed and emerging economies, China’s financial system is dominated by a large but undeveloped banking sector. According to statistics from the People’s Bank of China, bank loans accounted for 64.94% of social financing in 2019. Since the 1980s, China’s banking system has been under reform as part of the economic opening up policies. In the past, the big five state-owned commercial banks dominated China’s banking market, with more than 70% of the total lending business, and the establishment of branches by joint equity banks and local commercial banks was strictly regulated. In the last two decades, China’s banking system has undergone significant changes, allowing joint equity banks and local commercial banks to operate more like their state-owned counterparts. In 2006 and 2009, China’s Banking Regulatory Commission relaxed the entry restrictions on opening new branches for joint equity banks and local commercial banks. The number of branches and the market share of joint equity banks and local commercial banks have been increasing significantly following this deregulation, which has enhanced bank competition and banks’ ability to support economic development. In this paper, we investigated how changes in banks’ geographical distribution and increased bank competition affect firms’ leverage decisions. We use the number of bank branches within a certain radius around firms to measure the level of bank competition. Using 2000–2012 Chinese Industry Census data, we found that a higher number of bank branches around firms had a significantly positive effect on firms’ leverage for the whole sample and the sub-sample of non-state firms and high productive firms. However, we also noticed that the regression coefficient of the number of bank branches was statistically significant and negative for state firms and zombie firms. This indicated increased bank competition can stimulate the increase of “good leverage,” which effectively improved the efficiency of bank credit resource allocation. Our findings were robust to a series of alternative empirical designs such as controlling reverse causality, utilizing bank deregulation as an exogenous shock, and two-stage least-square regressions to control potential endogeneity. Further study indicated that a higher number of branches affected firms’ leverage mainly by alleviating financial constraints via the market mechanism but impeded relationship lending. We also investigate whether bank competition improved firms’ capital structure, and we found that underleveraged firms benefited more and that firms in an area with more bank branches adjusted their capital structure more rapidly. This study enriched the literature on banks’ geographical distribution, bank competition, and firms’ leverage decisions and provided empirical evidence for policy making to reform and develop the banking industry. We provided detailed analysis and established causal links between banks’ geographical distribution, bank competition, and firms’ leverage decisions. In recent years, the Chinese government has made great efforts to improve the accessibility and affordability of financial services. Our findings provided empirical support for China’s marketization reform of the banking sector and the development of inclusive finance. Our study has important policy implications. In the process of promoting structure deleveraging and improving the efficiency of financial resource allocation, the government should attach great importance to the construction and improvement of the bank competition environment and try to strengthen the role of the market mechanism.
bank competition;geographical distribution of branches;leverage;capital structure
To explore the background and basis of the node document