Interbank Financial Activity and Firms' Operating Risk in the Real Sector: Evidence from Regional-level Interbank Negotiable Certificates of Deposit (INCDs)
NI Xiaoran, LIU Shida
School of Economics, Xiamen University; School of Economics and Management, Tsinghua University
Summary:
During the post-crisis period, regulators encourage financial innovation to stimulate economic growth. However, financial innovation is accompanied by the rapid development of shadow banking, which has raised many concerns among practitioners and policymakers. Although many studies have discussed the unintended consequences of financial innovation on the financial system, empirical evidence of how financial innovation affects the real economy is rare. In this paper, we attempt to fill this gap by studying how interbank financial innovation can affect the operating risk and likelihood of stock price crashes of listed firms. Stock price crashes are regarded as extreme bad events in stock markets. They fundamentally depend on a firm's operating risk and are largely driven by the intentional hoarding of bad news by firm insiders. When a firm's operating risk is high, the firm is more likely to experience negative events during the operating process, leading firm insiders to withhold bad news from external investors. Once the bad news is suddenly leaked to the market, the firm will experience tremendous stock price crashes. Specifically, to understand how interbank financial innovation affects firms' operating risk, we focus on the introduction of Interbank Negotiable Certificates of Deposit (INCDs) in 2013. Although INCDs were introduced to propel the liberalization of interest rates, they have been widely used in the banking sector to circumvent regulations. Since INCDs are introduced by the banking sector at different times across different provinces, we are able to study the effects of regional interbank financial innovation on the firm stock price crash risk in a difference-in-differences (DiD) setting. We conduct a quarterly empirical analysis of listed Chinese firms over the 2011-2016 period. We find that the stock price crash risk of local listed firms increases significantly after INCDs are introduced into the corresponding region. The effect is also of economic significance: on average, the stock price crash risk of firms increases to around 9% of the sample standard deviation. We confirm that the increase in stock price crash risk emerges only after the introduction of INCDs, but not before it, indicating that the parallel trend assumption holds in the baseline DiD setting. This positive relationship is more pronounced among firms with higher risks and lower financial flexibility, indicating that the introduction of INCDs mainly affects firms that are susceptible to operational difficulties. Our results are robust when we consider alternative measures of the key variables, different subsamples, and other model specifications. Further analysis indicates that the introduction of INCDs is associated with increased cost of debt, higher level of risk-taking, poorer operating performance, and lower market values of local listed firms. Evidence indicates that the introduction of INCDs extends firms' financing chains and increases moral hazards in the credit market: some firms are more likely to undertake excessive risk and, thus, experience sudden negative events, which can increase the risk of stock price crashes. The above findings indicate that regional-level interbank financial innovation can intensify the moral hazard problem in the credit market, which will increase local firms' operating risk and potentially reduce the stability of financial markets. Our paper contributes to the literature in two aspects. First, different from the traditional view of bad news hoarding behavior and the micro-level determinants of stock price crash risk, our paper sheds light on how macro-level factors affect stock price crash risk. We use the introduction of INCDs at the provincial level as a quasi-exogenous shock and show that this financial innovation is an important macro-level determinant of firm operating risk and stock price crash risk. Second, our paper contributes to the literature on the real effects of financial innovation and shadow banking. The existing literature mainly focuses on how financial innovation and shadow banking activities affect the financial system, while their real effects are rarely studied. Our paper provides direct evidence of how interbank financial innovation can affect the operating risk of the real sector and the stability of the financial market. Lastly, our paper provides direct policy implications and evidence to support the introduction of new regulations for the asset management industry. Our study confirms the importance of policy goals in promoting the healthy development of multilevel capital markets, serving the real economy better, and maintaining the bottom line to prevent systemic financial risk.
倪骁然, 刘士达. 金融同业活动与实体企业经营风险——来自地区层面同业存单业务的证据[J]. 金融研究, 2020, 483(9): 136-153.
NI Xiaoran, LIU Shida. Interbank Financial Activity and Firms' Operating Risk in the Real Sector: Evidence from Regional-level Interbank Negotiable Certificates of Deposit (INCDs). Journal of Financial Research, 2020, 483(9): 136-153.
Acharya, Viral V., Ramin P. Baghai, and Krishnamurthy V. Subramanian. 2014. “Wrongful Discharge Laws and Innovation”, Review of Financial Studies, 56(4):301～346.
[40]
Acharya, Viral V., Jun Qian, Yang Su, and Zhishu Yang. 2019. “In the Shadow of Banks: Wealth Management Products and Issuing Banks' Risk in China”. Working Paper.
[41]
Allen, Franklin, and Douglas Gale. 2000. “Financial Contagion”, Journal of Political Economy, 108(1):1～33.
[42]
Allen, Franklin, Yiming Qian, Guoqian Tu, and Frank Yu. 2018. “Entrusted Loans: A Close Look at China's Shadow Banking System”, Journal of Financial Economics, 133(1):18～41.
[43]
Andreo, Panayiotis C., Christodoulos Louca, and Andreas P. Petrou. 2016. “CEO Age and Stock Price Crash Risk”, Review of Finance, 21(3): 1287～1325.
[44]
Chen, Donghua, Jeong-Bon Kim, Oliver Zhen Li, and Shangkun Liang. 2018. “China's Closed Pyramidal Managerial Labor Market and the Stock Price Crash Risk”, The Accounting Review, 93(3):105～131.
[45]
Chen, Joseph, Harrison Hong, and Jermey C. Stein. 2001, “Forecasting Crashes: Trading Volume, Past Returns, and Conditional Skewness in Stock Prices”, Journal of Financial Economics, 61(3):345～381.
[46]
Chen, Kaiji, Jue Ren, and Tao Zha. 2018. “What We Learn from China's Rising Shadow Banking: Exploring the Nexus of Monetary Tightening and Banks' Role in Entrusted Lending” American Economic Review, 108 (12): 3891~3936.
[47]
Diamond, Douglas W., and Philip H. Dybvig. 1983. “Bank Runs, Deposit Insurance, and Liquidity”, Journal of Political Economy, 401~419.
[48]
Gormley, Todd A., and David A. Matsa. 2016. “Playing It Safe? Managerial Preferences, Risk, and Agency Conflicts”, Journal of Financial Economics, 122(3):431～455.
[49]
Hachem, Kinda, and Zheng Song. 2015. “The Rise of China's Shadow Banking System”, Working Paper.
[50]
Hutton, Amy P., Alan J. Marcus, and Hassan Tehranian. 2009. “Opaque Financial Reports, R2, and Crash Risk”, Journal of Financial Economics, 94(1):67～86.
[51]
Jin, Li, and Stewart C. Myers. 2006. “R2 around the World: New Theory and New Tests”, Journal of Financial Economics, 79(2):257～292.
[52]
Kim, Jeong-Bon, Yinghua Li, and Liandong Zhang. 2011. “Corporate Tax Avoidance and Stock Price Crash Risk: Firm-Level Analysis”, Journal of Financial Economics, 100(3): 639～662.
[53]
Kothari, Sabino P., Susan Shu, and Peter D. Wysocki. 2009. “Do Managers Withhold Bad News?”, Journal of Accounting Research, 47(1):241～276.
[54]
Stigliz, Joseph E., and Andrew Weiss. 1981. “Credit Rationing in Markets with Imperfect Information”, American Economic Review, 71(3):393～410.
[55]
Wang, Hao, Honglin Wang, Lisheng Wang, and Hao Zhou. 2019. “Shadow Banking: China's Dual-Track Interest Rate Liberalization”. Working Paper.
[56]
Xu, Nianhang, Xiaorong Li, Qingbo Yuan, and Kam C. Chan. 2014. “Excess Perks and Stock Price Crash Risk: Evidence from China”, Journal of Corporate Finance, 25:419～434.
[57]
Zhu, Wei. 2016. “Accruals and Price Crashes”, Review of Accounting Studies, 21(2):349～399.
