Social Credit and Corporate Risk-Taking: Quasi-Natural Experimental Evidence from China
41 Pages Posted: 23 Aug 2022
Abstract
Although risk-taking plays a crucial role in corporate innovation and performance, little attention is paid on the impact of social credit on corporate risk-taking from an informal institutional perspective. Using the shock of Chinese social credit reform policy, we conduct difference-in-differences estimations to investigate the causal effects of social credit on corporate risk-taking. We find that social credit significantly increases corporate risk-taking. The underlying mechanism is alleviating agency costs and financing constraints. Further analysis shows that social credit increases corporate risk-taking in the absence of external formal institutions, indicating that there is a substitution effect between informal and formal institutions. Finally, our findings are significant mainly in firms with weaker corporate governance and higher external financing dependence. Overall, this study enriches the research on the driving factors of risk-taking at the firm level and provides a micro-level evaluation of economic consequences of Chinese credit system reform.
Keywords: Social Credit, risk-taking, Agency costs, financing constraints
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