Banks have a significant funding-cost advantage if their liabilities are protected by bailout guarantees. We construct a corporate finance-style model showing that banks can exploit this funding-cost advantage by just intermediating funds between investors and ultimate borrowers, thereby earning the spread between their reduced funding rate and the competitive market rate. This mechanism leads to a crowding-out of direct market finance and real effects for bank borrowers at the intensive margin: banks protected by bailout guarantees induce their borrowers to leverage excessively, to overinvest, and to conduct inferior high-risk projects. We confirm our model predictions using U.S. panel data, exploiting exogenous changes in banks' political connections, which cause variation in bailout expectations. At the bank level, we find that higher bailout probabilities are associated with more wholesale debt funding and lending. Controlling for loan demand, we confirm this effect on bank lending at the bank-firm level and find evidence on loan pricing consistent with a shift towards riskier borrower real investments. Finally, at the firm level, we find that firms linked to banks that experience an expansion in their bailout guarantees show an increase in their leverage, higher investment levels with indications of overinvestment, and lower productivity.

We investigate the unintended real effects of regulator-led minority shareholder activism on corporate innovation. We use manually collected data from the China Securities Investor Services Center (CSISC), a novel regulatory investor protection institution controlled by the China Securities Regulatory Commission (CSRC) that holds 100 shares of every listed firm. We find that by exercising its shareholder rights, the CSISC substantially curtails the innovation output of targeted firms. This effect is amplified in cases involving a high level of myopic pressure and few innovation incentives. We further observe variation in the real effects of different intervention methods. Textual analysis reveals that CSISC intervention with a myopic topic and negative tone contributes to a decrease in innovation. The results of a mechanism analysis support the hypothesis that regulator-led minority shareholder activism induces managerial myopia and financial constraints, impeding corporate innovation. Furthermore, CSISC intervention not only diminishes innovation output but also undermines innovation efficiency. In summary, our findings suggest that regulator-led minority shareholder activism exacerbates managerial myopia to cater to investors and financial constraints, ultimately stifling corporate innovation.

We estimate the financial and real effects of a subsidy program on imported capital goods recently implemented in China. We identify ffrms that have access to the subsidy program by combining data on catalogues of eligible products periodically released by the government and product-level import data. Our findings demonstrate that following the implementation of the program, eligible firms experience an increase in borrowing and gain access to loans at lower interest rates compared to non-eligible firms. This improved financial situation enables them to expand their fixed-asset investments, increase total output, and enhance their export performance. The expansion of production capacity also leads to improved investment efffciency and greater profitability. Further analysis reveals that the effects of the policy are particularly pronounced for non-state-owned enterprises and small firms in relatively competitive industries. This finding suggests that these firms face ex-ante financial constraints, and their marginal rate of return to capital is large.

We provide firm-level evidence on the real effects of shadow banking in terms of technological innovation. Firm-to-firm entrusted loans, the largest part of the shadow banking sector in China, enhance the borrowers’ innovation output. The effects are more prominent when the borrowers are subject to severer financial constraints, information asymmetry, and takeover exposures. A plausible underlying channel is capital reallocations from less productive but easy-financed lender firms to more innovative but financially less-privileged borrower firms. Our paper suggests that shadow banking helps correct bank credit misallocations and thus serves as a second-best market design in financing the real economy.

China’s emissions trading system applies a two-stage emissions intensity-based compliance quota allocation scheme different from the cap-and-trade systems prevalent in developed economies. It was designed to accommodate the country’s socioeconomic complexities and implemented following a learning-by-doing approach. Compliance firms significantly expanded green investment and production workforce. Their climate decisions are influenced by state ownership and regional heterogeneity. State-owned enterprises (SOEs) and less liberal market firms increased hiring, but not investment; non-SOEs and more liberal market firms grew investment. There are mixed welfare effects: compliance firms maintained productivity and efficiency; however, ordinary workers’ real wages were reduced, more prominent in SOEs.

We examine the roles of bank ownership and CEO political faction membership in facilitating or hindering the implementation of central bank policy in China. Specifically, we examine the response of China’s commercial banks to People’s Bank of China (PBC) guidelines intended to decrease mortgage lending and to slow down the rise in residential property prices. We find that both bank ownership and faction membership matter. Central government-owned banks whose CEOs are members of the specialist finance faction within the Chinese Communist Party (CCP) respond most strongly to PBC guidance, whereas provincial or city government-owned banks whose CEOs are members of a generalist faction respond least strongly. The implementation of PBC policy has real effects: in those cities where central government-owned banks with specialist CEOs constitute a larger percentage of total bank branches, house prices grew more slowly, as did the number of residential real estate transactions and the number of new listings. Where in contrast provincial and city government-owned banks with generalist CEOs dominate, the number of transactions grew faster; the rate of house price appreciation and the number of listings were however unaffected. We conclude that China’s different levels of government and the CCP’s different factions enjoy some discretion in responding to PBC guidance and that they exploit the discretion they are afforded to vary the strength of their response.

We provide firm-level evidence on the real effects of shadow banking in terms of technological innovation. Firm-to-firm entrusted loans, the largest part of the shadow banking sector in China, enhance the borrowers’ innovation output. The effects are more prominent when the borrowers are subject to severer financial constraints, information asymmetry, and takeover exposures. A plausible underlying channel is capital reallocations from less productive but easy-financed lender firms to more innovative but financially less-privileged borrower firms. Our paper suggests shadow banking helps correct bank credit misallocations and thus serves as a second-best market design in financing the real economy

This paper evaluates the impact of mobile cashless payment on credit provision to the underprivileged. Using a representative sample of Alipay users that contained detailed information about their activities in consumption, credit, investment, and digital footprints, I exploit a natural experiment to identify the real effects of cashless payment adoption. In this natural experiment, the staggered placement of Alipay-bundled shared bikes across different Chinese cities brings exogenous variations to the payment flow, allowing me to address the endogeneity issues and establish a causal relationship. I find that the use of in-person payment in a month increases the likelihood of getting access to credit in the same month by 56.3%. Conditional on having credit access, a 1% increase in the in-person payment flow leads to a 0.41% increase in the credit line. Those having higher in-person payment flow also use their credit lines more. Importantly, the positive effect of in-person payment flow on credit provision mainly exists for the less educated and the older, suggesting that cashless payment particularly benefits those who are traditionally underserved.

Policy actions by the Federal Reserve during the recent financial crisis often involve recapitalization of banks. This paper offers a theory of the non-neutrality of money for policy actions taking the form of injecting capital into banks via nominal transfers, in an environment where banking frictions are present in the sense that there exists an agency cost problem between banks and their private-sector creditors. The analysis is conducted within a general equilibrium setting with two-sided financial contracting. We first show that even with perfect nominal flexibility, the recapitalization policy can have real effects on the economy. We then study the design of the optimal long-run recapitalization policy as well as the optimal short-run policy responses to banking riskiness shocks.