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Does institutional cross-ownership reduce corporate shadow banking activities? Evidence from Chinese firms

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  • Xu, Zhibo
  • Padmanabhan, Prasad
  • Huang, Chia-Hsing

Abstract

Using data from Chinese listed firms over the 2007–2022 period, the validity of the links between institutional cross-ownership and shadow lending activities is explored. Study results suggest that institutional cross-ownership can reduce corporate shadow lending activities in the portfolio of firms they own. Results remain robust to several endogeneity and robustness tests. Further investigation confirms that the negative relationship between institutional cross-ownership and shadow lending activities arises from the information related advantages and their unique ability to internalize synergistic governance externalities that institutional investors possess. These effects are particularly pronounced for state-owned enterprises, for firms with active institutional investors, and for those with poor growth prospects. Study results also indicate that institutional cross-ownership mitigates the destructive effect of shadow lending activities on real sector investments and on firm market values. Policy wise, these findings offer valuable insights for regulators seeking to enhance corporate governance and mitigate financial risks in the system. Future academic research could investigate whether these effects persist across diverse economic and regulatory contexts.

Suggested Citation

  • Xu, Zhibo & Padmanabhan, Prasad & Huang, Chia-Hsing, 2025. "Does institutional cross-ownership reduce corporate shadow banking activities? Evidence from Chinese firms," Pacific-Basin Finance Journal, Elsevier, vol. 94(C).
    • Handle: RePEc:eee:pacfin:v:94:y:2025:i:c:s0927538x25002525
    DOI: 10.1016/j.pacfin.2025.102915
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