Impact of shadow banking of nonfinancial firms on equity mispricing

Nonfinancial firms have increasingly engaged in shadow banking activities. Using data from Chinese A-share nonfinancial firms, we empirically examine how such activities affect equity mispricing. The results indicate that shadow banking by nonfinancial firms is positively associated with equity mispricing. This finding still holds when we address potential endogeneity problems and use alternative proxies. This relationship is less pronounced among firms with higher levels of digitalization, stronger corporate governance, more market development business environments, and state-ownership structure, suggesting that information asymmetry, agency problems, and regulatory uncertainty are key underlying mechanisms. Further analysis shows that increased shadow banking activity raises stock price volatility, heightens crash risk, and increases the cost of equity, with these effects operating in part through equity mispricing. Our study extends the literature on equity mispricing and highlights the consequences of nonfinancial firms' engagement in shadow banking activities in the capital market.