Do Financial Frictions Explain Chinese Firms’ Saving and Misallocation?

38 Pages Posted: 26 Mar 2018 Last revised: 9 Oct 2021

See all articles by Yan Bai

Yan Bai

University of Rochester - Department of Economics

Dan Lu

University of Rochester

Xu Tian

University of Georgia - Terry College of Business - Department of Finance

Date Written: March 2018

Abstract

We use firm-level data to identify financial frictions in China and explore the extent to which they can explain firms' saving and capital misallocation. We first document the features of the data in terms of firm dynamics and debt financing. State-owned firms have higher leverage and pay much lower interest rates than non-SOEs. Among privately owned firms, smaller firms have lower leverage, face higher interest rates, and operate with a higher marginal product of capital. We then develop a heterogeneous-firm model with two types of financial frictions, default risk, and a fixed cost of issuing loans. Our model generates endogenous borrowing constraints as banks consider the firm's productivity, asset, and debt when providing a loan. Using evidence on the firm size distribution and financing patterns, we estimate the model and find it can explain aggregate firms' saving and investment and around 50 percent of the dispersion in the marginal product of capital within private firms, which translates into a TFP loss as high as 12%.

Suggested Citation

Bai, Yan and Lu, Dan and Tian, Xu, Do Financial Frictions Explain Chinese Firms’ Saving and Misallocation? (March 2018). NBER Working Paper No. w24436, Available at SSRN: https://ssrn.com/abstract=3149261

Yan Bai (Contact Author)

University of Rochester - Department of Economics ( email )

Harkness Hall
Rochester, NY 14627
United States

Dan Lu

University of Rochester ( email )

300 Crittenden Blvd.
Rochester, NY 14627
United States

Xu Tian

University of Georgia - Terry College of Business - Department of Finance ( email )

620 S Lumpkin St
Athens, GA 30602
United States

HOME PAGE: http://www.xutianur.com

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