Do Financial Frictions Explain Chinese Firms' Saving and Misallocation? / Yan Bai, Dan Lu, Xu Tian.

Format:

Book

Author/Creator:

Bai, Yan.

Contributor:

National Bureau of Economic Research.

Lu, Dan.

Tian, Xu.

Series:

Working Paper Series (National Bureau of Economic Research) no. w24436.

NBER working paper series no. w24436

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

We use firm-level data to identify financial frictions in China and explore the extent to which they can explain firms' saving and capital misallocation. We first document the features of the data in terms of firm dynamics and debt financing. State-owned firms have higher leverage and pay much lower interest rates than non-SOEs. Among privately owned firms, smaller firms have lower leverage, face higher interest rates, and operate with a higher marginal product of capital. We then develop a heterogeneous-firm model with two types of financial frictions, default risk, and a fixed cost of issuing loans. Our model generates endogenous borrowing constraints as banks consider the firm's productivity, asset, and debt when providing a loan. Using evidence on the firm size distribution and financing patterns, we estimate the model and find it can explain aggregate firms' saving and investment and around 50 percent of the dispersion in the marginal product of capital within private firms, which translates into a TFP loss as high as 12%.

Notes:

Print version record

March 2018.