Bank Competition,Financing Constraints And Corporate Investment

Corporate investment is the backbone of firm value growth and one of the three driving forces of the macro economy.External financing is one of the key factors influencing firms’ investment decisions.As the main supplier of indirect financing to firms in China,the bank industry has changed significantly since the1980 s.The number of bank branches around enterprises has been increasing,and the financial accessibility of enterprises has continued to improve.However,some banks are blindly competing with each other in first and second-tier cities,leading to the "siphon effect" of financing enterprises in large coastal cities with deposits from the mainland.Based on the conflicting facts above,this paper focuses on the relationship between bank competition,financing constraints and firm investment.Firstly,by reviewing the literature,this paper analyses the mechanisms through which bank competition affects firm investment via financing constraints from the perspectives of "investment-cash flow sensitivity" and "financialisation",combining the heterogeneity of firm ownership,bank types and cities.Then,based on the panel data of 3430 A-share listed enterprises in China from 2001 to 2019,the paper finds that:(1)bank competition can alleviate firms’ financing constraints,but has a negative effect on their real investment.Specifically,when the number of bank branches in 10 km around the firm grows from zero to the mean level,it will reduce the real investment percentage by 0.005%.(2)This relationship is relevant to the "crowding out effect" of financial investment,which means that although bank competition eases firms’ financing constraints,the surplus external funds are not used for real investment,but are instead invested in financial assets which are less risky and more attractive,thus generating the "crowding out effect" of real investment as proposed by Zhang & Zhang(2016).(3)A test of the "distance-information" mechanism shows that bank branch expansion shortens firms’ minimum distance to lender,thereby increasing their credit availability.However,the paper also finds that the bank branches expansion is more common in eastern and central provinces,and that new bank branches around state-owned enterprises(SOEs)is more than that of non-state-owned enterprises.This implies that,although bank competition has improved credit availability to enterprises at an overall level,more funds have flowed to state-owned sector in economically developed areas,reflecting the misallocation of credit resources.(4)Heterogeneity analysis shows that the "crowding out effect" is only significant in the sub-sample of large-scale,less financing-constrained and state-owned enterprises.Only the competition from state-owned banks and joint-equity banks significantly supports this mechanism.Besides,the "crowding out effect" is only significant in the eastern provinces,and the first and second tier cities.Meanwhile,the paper finds that "ownership discrimination" exists in state-owned bank loans based on the statistics of listed companies’ loans.This finding provides statistical support for the explanation of the "crowding out effect" in the sample of state-owned enterprises.Therefore,combining Conclusion 2 and Conclusion 3,it can be concluded that the "crowding out effect" exacerbated by bank competition is the result of credit misallocation under the "ownership discrimination" and "size discrimination" in financing.The contributions of this paper are:(1)This paper enriches the literature in terms of the negative impact of bank competition and finds that bank competition has a negative impact on firm real investment due to the "crowding-out effect" of firm financialization.Furthermore,this paper finds that the "crowding out effect" is caused by credit misallocation and thus holds only for large,state-owned and less financing-constrained firms.(2)The paper adds a mechanism test of the "distance-information" hypothesis,which is one of the mechanisms for using the number of bank branches around a firm as an indicator of bank competition,yet rarely mentioned in current literature.(3)The paper uses the number of bank branches nearby a firm as the measure of bank competition,which is more detailed and better at controlling endogeneity problems,than the commonly used HHI indicator.