Social Credit and Corporate Risk-Taking: Quasi-Natural Experimental Evidence from China

41 Pages Posted: 23 Aug 2022

See all articles by Yunqing Tao

Yunqing Tao

Peking University - National School of Development

Dongmin Kong

School of Economics, Huazhong University of Science and Technology

Nan Sun

Jinan University

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

Suggested Citation

Tao, Yunqing and Kong, Dongmin and Sun, Nan, Social Credit and Corporate Risk-Taking: Quasi-Natural Experimental Evidence from China. Available at SSRN: https://ssrn.com/abstract=4198516

Yunqing Tao (Contact Author)

Peking University - National School of Development ( email )

Beijing, 100871
China

Dongmin Kong

School of Economics, Huazhong University of Science and Technology ( email )

Bldg. of Econ. School, Louyu Rd. 1037#
HUST, Hongshan Dist.
Wuhan, Hubei 430074
China

Nan Sun

Jinan University ( email )

Huang Pu Da Dao Xi 601, Tian He District
Guangzhou, 510632
China

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