Geographic expansion of banks and enterprise investment efficiency: Structural evidence from China

Abstract

The relationship between monetary policy and business performance has long attracted attention. This paper explores the impact of geographic expansion of banks on enterprise investment efficiency, using a panel dataset from 2011 to 2019 of listed Chinese enterprises each matched with commercial bank branches available within a certain geographic area. Empirical analyses indicate that bank expansion can significantly increase the investment efficiency of enterprises and the result is robust considering regional variations and possible endogenous biases. A structural analysis indicates that bank expansion induced credit easing is the main factor contributes to investment efficiency increases whereas more mortgage and pledge loans leads to investment efficiency decreases. Neglecting the structural change would find a significant but negative effect of total lending on enterprise investment efficiency with the geographic expansion of banks. These changes are evident and robust for large enterprises and state-owned enterprises while investment benefit of bank expansion is negligible for the small and the private. This paper provides policy reference for orderly competition in banking sector and efficiency improvement of enterprises in China and other developing economics facing with similar supply-side reform.