Banking Integration and Capital Misallocation: Evidence from China
Review of Corporate Finance Studies, Forthcoming
74 Pages Posted: 6 Sep 2023
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: Suggested Citation