Effect of green credit policy on shadow banking activities: entrusted loan evidence from Chinese listed firms

Abstract

This paper investigates whether green credit policy can mitigate firms’ financialization. Using data from Chinese non-financial public listed firms during 2008 to 2019, we take the green credit policy promulgated in 2012 as a quasi-natural experiment and find that: (1) the green credit policy can reduce firms’ entrusted loans, especially affiliated entrusted loans. Moreover, the governance effect exerted by banks’ green credit policy reduces free cash flow and excess cash in heavily polluting firms, as shown in mechanism analysis. (2) The profit-seeking incentive dominates shadow banking activities in heavily polluting enterprises. (3) The 2012 green credit guidelines reduce entrusted loans maturity but increase the interest rate. The findings of this paper provide market-oriented insights into the regulation of shadow banking activities. This research also contributes to the literature on the effects of green credit policy by exploring their impact on firm shadow banking activities, and takes one step further to investigate the effect of green credit policy on firms’ entrusted loans. This paper also sheds light on how green credit policy can alleviate the imperfections and distortions of financial markets in the emerging market.

Keywords:

• green credit policy
• heavily polluting enterprises
• shadow banking
• entrusted loans

Disclosure statement

No potential conflict of interest was reported by the authors.

Supplemental data

Supplemental data for this article can be accessed here.

Notes

1 ST firms have suffered losses for consecutive years.

2 The “Big Four” banks refer to the Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Bank of China (BOC), and Agricultural Bank of China (ABC).

Additional information

Funding

Chinese National Funding of Social Sciences (Grant No 20CJL034); Shanghai Social Science Foundation (Grant No. 2019EJB007).