Does Shadow Banking Regulation Constrain the Idiosyncratic Risk of Firms? Evidence from a Quasi-Natural Experiment in China

Abstract

We explore whether tighter regulation of shadow banking improves finance market pricing efficiency by examining the regulation’s impact on idiosyncratic risk. Using the implementation of China’s New Asset Management Regulation, a strict regulatory policy targeting shadow banking activities, as an exogenous shock, we find that listed firms’ idiosyncratic risk significantly decreased after the policy’s issuance. Our findings remain consistent after applying a series of robustness tests and endogeneity checks. Mechanism analysis shows that the policy improved the listed firms’ information disclosure quality. Heterogeneity tests reveal that the policy’s effect is more pronounced in firms with poorer corporate governance, weaker external supervision, and firms with lower market value. This paper enriches empirical evidence on the microeconomic consequences of shadow banking activities and offers some policy implications for shadow banking regulation.

Keywords: Shadow Banking, New Asset Management Regulation, Idiosyncratic Risk