Does Interest Rate Liberalization Lower the Operational Risks of Enterprises？Dual Perspectives of Financing Constraints and Financialization
SI Dengkui, LI Xiaolin, KONG Dongmin, JIANG Chun
School of Economics, Qingdao University; School of Economics, Ocean University of China; School of Economics, Huazhong University of Science and Technology; The Center of Economic Development Research, Wuhan University
Summary:
The COVID-19 pandemic caused profound and unprecedented changes, which have increased the complexity and uncertainty of both internal and external business environments. China is facing the triple pressures of shrinking demand, supply shocks and weakening expectations. Moreover, the production and operation of enterprises are facing severe challenges. One feature of the structural contradiction in China's economy is that when the financial sector grows rapidly, the real economy starts to decline. Consequently, non-financial enterprises shift from their main business to financial business, showing an obvious trend of financialization. This weakens the structural adjustment function of the financial sector to the real economy and aggravates the accumulation of risks in the real economy. The Fourteenth Five-Year Plan clearly states that there should be a focus on improving the financial system to effectively support the real economy. How to improve the structural adjustment function of the financial sector to the real economy is an important goal of financial supply-side structural reform. Interest rate liberalization reform has led to considerable concern in the government and among scholars regarding how it affects the real economy. This study provides a feasible explanation for the internal logic on how interest rate liberalization affects enterprise operational risk, with theoretical analysis showing that interest rate liberalization reduces enterprises' operational risk by easing their financing constraints and inhibiting their financialization. This study uses two external shocks to identify the causal effect of interest rate liberalization on enterprise operational risk, namely the deregulation of the upper limit of loan interest rates in October 2004 and the reduction of limits on loan interest rates in July 2013 by the People's Bank of China, and constructs quasi-natural experiments to verify the above theoretical inference. The empirical results show that interest rate liberalization reduces the operational risk of enterprises. When interest rate liberalization rises by one standard deviation, operational risks decrease by approximately 2.39% of the sample standard deviation. This result indicates that prudent financial liberalization promotes the orderly operation of enterprises. In particular, interest rate liberalization reduces enterprise operating risk through the mechanisms of easing financing constraints and inhibiting financialization. Furthermore, this effect is pronounced for firms facing severe financing constraints and increased industry competition and investment opportunities. This finding suggests that during financial liberalization, effectively providing classified auxiliary conditions from the dual perspectives of “financing” and “investment” plays an important role in maintaining stable, healthy and orderly economic development. The marginal contributions and main work of this study are threefold. First, while previous studies have focused on the firm-level determinants of enterprise operational risk and explained the evolution and causes of enterprise operational risk from a financial perspective, this study focuses on what drives enterprise operational risk from the perspective of interest rate liberalization reform and provides evidence in favor of deepening the reform of the financial system to effectively support the orderly operation of real enterprises. Second, this study theoretically explains the feasibility of interest rate liberalization in reducing enterprise operational risk by easing financing constraints and inhibiting financialization. In particular, interest rate liberalization reduces enterprises' operational risk by suppressing their profit chasing motivation (rather than preventive savings motivation) during financialization, which is important for deepening the financial system reform to effectively guide capital “from virtual to real” and promote the high-quality development of the real economy. Third, this study constructs quasi-natural experiments by taking the cancellation of the upper and lower limits of loan interest rates of financial institutions and employs a difference-in-differences model to identify the causal relationship between interest rate liberalization and enterprise operational risk. The identification strategy improves the reliability of the results and confirms that orderly interest rate liberalization plays a positive role in reducing enterprise operational risks.
司登奎, 李小林, 孔东民, 江春. 利率市场化能降低企业营运风险吗？——基于融资约束和企业金融化的双重视角[J]. 金融研究, 2023, 511(1): 113-130.
SI Dengkui, LI Xiaolin, KONG Dongmin, JIANG Chun. Does Interest Rate Liberalization Lower the Operational Risks of Enterprises？Dual Perspectives of Financing Constraints and Financialization. Journal of Financial Research, 2023, 511(1): 113-130.
Allen, F., Y. Qian, G. Tu, and F. Yu, 2019. “Entrusted Loans: A Close Look at China's Shadow Banking System”, Journal of Financial Economics, 133(1): 18～41.
[17]
Chang, X., S. Dasgupta, G. Wong, and J. Yao, 2014. “Cash-Flow Sensitivities and the Allocation of Internal Cash Flow”, Review of Financial Studies, 27(12): 3628～3657.
[18]
Chen, Z., S. Poncet, and R. X. Xiong, 2020. “Local Financial Development and Constraints on Domestic Private-firm Exports: Evidence from City Commercial Banks in China”, Journal of Comparative Economics, 48(1): 56～75.
[19]
Denis, D. J., and V. Sibilkov, 2010. “Financial Constraints, Investment and the Value of Cash Holdings”, Review of Financial Studies, 23(1): 247～269.
[20]
Dickinson, V., 2011. “Cash Flow Patterns as a Proxy for Firm Life Cycle”, Accounting Review, 86(6): 1969～1994.
[21]
Faulkender, M., and R. Wang, 2006. “Corporate Financial Policy and the Value of Cash”, Journal of Finance, 61(4): 1957～1990.
[22]
Hadlock, J., and J. Pierce, 2010. “New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index”, Review of Financial Studies, 23(5):1909～1940.
[23]
Han, S., and J. Qiu, 2007. “Corporate Precautionary Cash Holding”, Journal of Corporate Finance, 13(1): 43～57.
[24]
Kim, C., D. C. Mauer, and A. E. Sherman, 1998. “The Determinants of Corporate Liquidity: Theory and Evidence”, Journal of Financial and Quantitative Analysis, 33(3): 335～359.
[25]
Leon, F., 2015. “Does Bank Competition Alleviate Credit Constraints in Developing Countries？”, Journal of Banking & Finance, 57:130～142.
[26]
McKinnon, R. I., 1973. “Money and Capital in Economic Development”, American Politicalence Review, 68(4): 1822～1824.
[27]
Owen, A. L., and J. M. Pereira, 2018. “Bank Concentration, Competition, and Financial Inclusion”, Review of Development Finance, 8(1): 1～17.
[28]
Shaw, E. S., 1973. “Financial Deepening in Economic Development”, New York: Oxford University Press.
[29]
Shim, J., 2019. “Loan Portfolio Diversification, Market Structure and Bank Stability”, Journal of Banking & Finance, 104: 103～115.
[30]
Shu, J. X., C. S. Zhang, and N. Zheng, 2020. “Financialization and Sluggish Fixed Investment in Chinese Real Sector Firms”, International Review of Economics & Finance, 69:1106～1116.
[31]
Zhang, C. S., and N. Zheng, 2020. “Monetary Policy and Financial Investments of Nonfinancial Firms: New Evidence from China”, China Economic Review, 60:1～15.
