Risk Prevention and Resolution of Real-Sector Firms' Equity Participation and Control in Financial Institutions: From the Perspective of External Governance
YANG Jia, LU Yao, GE Qianyu
School of International Trade and Economics, University of International Business and Economics; School of Economics and Management, Tsinghua University; SoftBank Vision Fund
Summary:
Security is a fundamental principle for building China's new development paradigm during the 14th Five-Year Plan period, which explicitly calls for “safeguarding financial security and firmly holding the bottom line of no systemic financial risks.” As China's financial sector opens while financial licenses remain scarce and tightly regulated, an increasing number of real-sector firms have entered the financial sector by taking minority or controlling stakes in financial institutions, even establishing financial holding companies in some cases. These moves are intended to integrate industry and finance, lower financing costs, and enhance resource allocation efficiency, thereby promoting the transformation and upgrading of the real economy. However, this process can generate unintended risks. Moreover, the internal capital markets formed by such integration tightly couple the real and virtual economies, allowing financial risk to spread rapidly across equity networks and trigger systemic risk. Events like the Baoshang Bank failure and the Evergrande crisis demonstrate that traditional instruments, including micro-prudential regulation, deposit insurance, and the central bank's lender-of-last-resort function have played a positive role in ensuring financial stability, but are insufficient to fully address the new financial risks arising from increasingly complex business activities. The national-level calls to “reinforce corporate primary responsibility and resolve potential risks through market-oriented and law-based means”, providing a clear policy basis for incorporating external governance into the financial security framework. In this context, this paper examines, from an external governance perspective, the role of external market competition in preventing and mitigating the risks for real-sector firms with stakes in financial institutions. The goal is to provide robust theoretical support and practical policy guidance for the government's efforts to construct a more effective financial safety net using market-based tools. This study examines whether market competition, as an external governance mechanism, can effectively curb the financial risks associated with firms' equity stakes in financial institutions (including financial holding companies). To do so, we use a sample of Chinese A-share listed non-financial firms from 2009 to 2023. We first employ the Gradient Boosting Decision Tree (GBDT) , a machine-learning algorithm, to predict firms' engagement in financial institutions and identify key determinants. The results show that firm size and financial leverage have strong predictive power and are positively associated with such engagement. Furthermore, firm age and institutional ownership are stronger predictors of shareholding behavior, whereas real-sector performance and cash holdings are stronger predictors of controlling financial institutions. Further analysis indicates that both investing in and controlling financial institutions significantly increase real-sector enterprises' financial risk, with related-party transactions being the primary mechanism. More importantly, we find that greater external market competition significantly reduces financial risk of real-sector enterprises investing in or controlling financial institutions. Mechanism tests reveal that competition operates mainly through two channels: curbing related-party transactions and improving core business performance. Finally, extended analyses confirm that market competition is also effective in reducing the systemic risk of real-sector firms that invest in or control financial institutions, and this governance mechanism remains effective for firms that control financial holding companies. This paper makes four main contributions. First, unlike prior studies focusing on internal governance, we provide new empirical evidence on post-integration risk governance from the perspective of external market competition. Second, we enrich the literature on the risk consequences of the shift from real-sector investment to financial investment, demonstrating that related-party transactions are a key risk transmission channel. This finding offers policy recommendations for improving the supervision procedures of related transactions and for facilitating the safe development of China's financial industry. Third, we extend the literature on industry-finance integration beyond traditional analyses of performance and efficiency to the core issue of risk governance. Fourth, in the literature on internal capital markets, we show that they propagate risk via related-party transactions and explore how external market governance can block this transmission, offering important insights for preventing systemic financial risks. The policy implications are clear: the government should foster a fair and competitive market environment, leveraging market forces to induce firms to voluntarily optimize their risk controls, thereby effectively reducing the financial risks arising from their engagement with financial institutions. In sum, this study underscores the critical role of external governance in strengthening financial regulation, provides a novel perspective on preventing and resolving systemic financial risk, and contributes to building China into a financial powerhouse, ensuring stable and healthy national economic development.
杨佳, 陆瑶, 葛茜予. 实体企业参控股金融机构的风险防范与化解——基于外部治理的视角[J]. 金融研究, 2025, 542(8): 37-55.
YANG Jia, LU Yao, GE Qianyu. Risk Prevention and Resolution of Real-Sector Firms' Equity Participation and Control in Financial Institutions: From the Perspective of External Governance. Journal of Financial Research, 2025, 542(8): 37-55.
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