Economic policy uncertainty and shadow banking: Firm-level evidence from China

This paper identifies the causal effect of economic policy uncertainty (EPU) on the shadow banking activities of nonfinancial enterprises (NFEs) in China. Using hand-collected data on corporate shadow banking during the period of 2007-2019, we find that there is a positive effect of EPU on shadow banking activities of NFEs and a one standard deviation increase in EPU is significantly associated with a 0.0690 standard deviation rise of firms' shadow banking business. Furthermore, the effect is more prominent in state-owned enterprises (SOEs) and in firms with high external financing dependence. Financing constraints and the yield spreads between financial and real investments are the main channels through which EPU affects firms' shadow banking business. Our findings shed fresh light on the understanding of how uncertainty regarding economic policies affects firm investment decisions and enrich the study of determinants of firm financialization.