Effect of Shadow Banking Activities on Firm Risk and Performance: Entrusted Loan Evidence from Chinese Listed Firms*

Abstract

This study investigates the effect of non-financial firms' activities in shadow banking on firm risk and performance. Using manually collected data of entrusted loans from Chinese listed firms, we find that lending firms' bankruptcy risk and performance increases from their engagement of entrusted loan businesses in the year the loans are issued and in the following year. Further, firms' risk increases and performance improves significantly when firms are financially healthy, financially constrained, and non-state-owned. Overall, our findings provide policy implications that the risk of shadow banking activities must be cautious.