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Financial institution coverage and firm's cross-regional investment: Evidence from China

Author

Listed:
  • Liou, Jennhae
  • Wang, Zijin
  • Jiau, Tzeryan
  • Zhao, Qiuyun

Abstract

This study examines the role of financial institution coverage in facilitating cross-regional capital flows within China, offering insights into how financial market development influences spatial capital allocation. Using granular data on 10.5 million city-year observations of Chinese listed firms and their subsidiaries (2007–2022), we demonstrate that cities with greater financial institution density attract significantly more cross-regional investments. Policy banks emerge as key drivers compared to commercial banks, particularly for firms operating in competitive markets or exhibiting higher risk tolerance. Mechanism analyses reveal that financial institution coverage facilitates non-local corporate investment by lowering financing costs through the effects of mitigating information frictions and reducing financial institute market power. Our findings extend the discourse on intra-national capital mobility by identifying financial infrastructure as a critical determinant of spatial investment patterns, with implications for understanding institutional roles in emerging markets' financial integration.

Suggested Citation

  • Liou, Jennhae & Wang, Zijin & Jiau, Tzeryan & Zhao, Qiuyun, 2025. "Financial institution coverage and firm's cross-regional investment: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 106(C).
    • Handle: RePEc:eee:finana:v:106:y:2025:i:c:s1057521925006581
    DOI: 10.1016/j.irfa.2025.104571
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance

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