Strict Financial Regulation,Short-Term Loans for Long-Term Investment and Corporate Default Risk:Evidence from New Regulations on Asset Management
Strict financial regulations aim to prevent and mitigate systemic risks while fostering high-quality economic development.Although the New Regulations on Asset Management(NRAM),introduced by China's regulatory authorities in 2018,effectively curtailed the expansion of shadow banking,reduced systemic risks and deterred enterprises from engaging in speculative activities,which may also entail certain costs in terms of corporate financing and credit allocation.This study en-deavors to identify the causal relationship between strict financial regulation and corporate default risk,with a specific focus on short-term loans for long-term investments.This article employs the implementation of the NRAM as a quasi-natural experiment.It utilizes semi-annual data from 2016 to 2022 for A-share non-financial,non-real estate listed companies in China as samples to examine the causal effects of strict financial regulations on the default risk of companies with short-term loans for long-term investments.The findings suggest that NRAM could exacerbate default risks for companies characterized by a high level of investment-financing maturity mismatch,with this effect being particularly pronounced among non-state-owned firms,low-growth entities and regions with limited banking competition.The mechanism test reveals that the tightening of shadow banking activities prompted by NRAM amplifies the rollover pressure for companies with significant investment-financing ma-turity mismatches,thereby increasing their default risk.Additional investigation suggests that NRAM has varied effects on cor-porate default risk,including liquidity effects and governance effects,depending on the underlying reasons for short-term loans used for long-term investments.For the enhancement of China's financial regulation policies,this article proposes four recommendations.Firstly,policies should strike a balance between promoting stable growth and enforcing stringent regulation and deleveraging measures.Sec-ondly,the implementation should proceed gradually,guiding the healthy development of financial instruments such as en-trusted loans,trust loans,and wealth management products to support the real economy.Thirdly,there should be an enhance-ment in support for financing small and medium-sized enterprises(SMEs)and private enterprises.Lastly,companies should be encouraged to optimize their investment and financing term structure while improving their risk management capabilities.
Strict Financial RegulationShort-Term Loans for Long-Term InvestmentDefault Risk
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