Strict Financial Regulation and the Resource Allocation in the Internal Capital Market of Business Group:Evidence from the New Asset Management Regulation
On April 27,2018,four ministries and commissions including the People's Bank of China jointly issued the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions(hereinafter referred to as the New Asset Management Regulation),which represents the most extensive,stringent,and pioneering regulatory document in China's asset management industry.It attempts to optimize the structural allocation of financial resources through the comprehensive supervision over shadow banking activities,thereby promoting the financial sector to better serve the real economy.Using the quasi-natural experiment of the implementation of the New Asset Management Regulation,this paper explores whether the strict financial regulation promotes the dynamic adjustment of resources in the internal capital market of business group,thereby achieving the goal of improving the efficiency of resource allocation.This paper finds that after the implementation of the New Asset Management Regulation,the ratio of subsidiaries'cash holdings in business groups with a higher degree of financial asset allocation significantly decreased.Mechanism analysis indicates that the New Asset Management Regulation reduces the profit margin of financial investment activities and the allocation of financial assets,which are the potential channels.In addition,faced with the New Asset Management Regulation,the business groups realize the reduction of the ratio of subsidiaries'cash holdings by influencing the dividend decision of their subsidiaries.This paper conducts cross-sectional tests from two aspects,namely,the business group's motivation for control and the control capability,and finds that the above effect is stronger when the motivation for control is stronger,namely,when the agency cost between the parent company and its subsidiaries is higher,the investment opportunity of the parent company is greater,and the competition in the business group industry is more intense;when the control capability is greater,namely,when the geographical distance between the parent company and its subsidiaries is closer,the average shareholding ratio of the parent company to its subsidiaries is larger.The results of the economic consequences tests indicate that the New Asset Management Regulation drives the dynamic adjustment of internal capital market resources within business groups,ultimately improving the value of the business groups and the total factor productivity.Our findings not only provide new micro-evidence on the economic consequences of financial regulation from the perspective of resource allocation in the internal capital market,but also shed light on how to deal with the relationship between financial regulation and real economic growth.To bolster China's financial supervision system,it is imperative to comprehensively align unified supervisory objectives,with a particular emphasis on considerations of economic efficiency,in order to effectively fulfill financial oversight responsibilities and enhance the synergy between finance and the real economy.
financial regulationthe New Asset Management Regulationbusiness groupinternal capital marketthe ratio of cash holdings
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