Credit mismatch and non-financial firms’ shadow banking activities —evidence based on entrusted loan activities

Abstract

When governments opt for financial repression policies, credit mismatch becomes more prevalent. This may lead some non-financial firms with excessive loans to financialize their operations and undertake shadow banking activities, that is, entrusted loans. Using all listed Chinese firm's financial data and entrusted loans data from 2008 to 2016, this study investigates the impact of credit mismatch on firm's entrusted loans. Results show that, the more credit mismatch, the higher the tendency and the size of firm's entrusted loans. Above the relationship is more significant when under some certain backgrounds, such as a higher degree of government intervention, tighter monetary policy as well as lack of investment opportunities, and state-owned enterprises. Further analysis reveals that a firm's engagement in entrusted loans can harm its main business activities. This study intends to enhance our understanding of the shadow banking activities as means of funds reallocation within China's financial system.