Banking Integration and Capital Misallocation: Evidence from China

Review of Corporate Finance Studies, Forthcoming

74 Pages Posted: 6 Sep 2023

See all articles by Naide Ye

Naide Ye

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Dongmin Kong

School of Economics, Huazhong University of Science and Technology

Date Written: August 7, 2023

Abstract

Using the staggered intercity but within-province deregulation of local banks in China as exogenous variations, we evaluate the effect of banking integration across geographical segmentation on capital misallocation. Based on an administrative dataset comprehensively covering Chinese manufacturing firms, we find that for firms with initially high marginal revenue products of capital (MRPK), the integration increases physical capital by 19.3%, and reduces MRPK by 33.1% relative to low MRPK firms. Our findings are more pronounced for non-stated-owned firms and firms with higher exposure to integrated banks. The integration also significantly increases the responsiveness of firm’s investment to deposits change of neighboring cities.

Keywords: banking integration, capital misallocation, marginal revenue products of capital (MRPK), China.

JEL Classification: G3

Suggested Citation

Ye, Naide and Kong, Dongmin, Banking Integration and Capital Misallocation: Evidence from China (August 7, 2023). Review of Corporate Finance Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4507159 or http://dx.doi.org/10.2139/ssrn.4507159

Naide Ye

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Dongmin Kong (Contact Author)

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

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

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