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The real effect of shadow banking regulation on corporate innovation: Evidence from conduit business

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  • He, Siyi
  • Jin, Qinglu
  • Wu, Sirui

Abstract

As a crucial component of China's shadow banking system, conduit business is the practice whereby banks channel capital to borrowers through non-bank entities' asset management products (AMPs). Exploiting China's 2017 regulation that prohibited conduit business and adopting a difference-in-differences design, we show that strengthened regulation on shadow banking curbs both innovation inputs and outputs. The decrease in innovation inputs and outputs is mainly concentrated in expensed R&D and non-invention patents, suggesting that firms tactically adjust innovative activities. Further analyses show that such effects are more pronounced for firms that are already facing severe financial constraints and those with restricted access to market-led and government-led capital. Additionally, the strengthened regulation on shadow banking also reduces R&D expenditures for new projects and patents that do not comply with industrial policies to reduce failure risks. This study adds to the literature on shadow banking by offering its real effect on corporate innovation and provides implications regarding shadow banking regulation.

Suggested Citation

  • He, Siyi & Jin, Qinglu & Wu, Sirui, 2025. "The real effect of shadow banking regulation on corporate innovation: Evidence from conduit business," Pacific-Basin Finance Journal, Elsevier, vol. 90(C).
    • Handle: RePEc:eee:pacfin:v:90:y:2025:i:c:s0927538x24004086
    DOI: 10.1016/j.pacfin.2024.102656
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    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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