The financial resource curse: Interest rate deregulation and firms' shadow banking activities

Abstract By exploiting China's 2013 interest rate deregulation, we analyse whether the financial resource curse exists. The results show that after the deregulation, low‐risk firms with more credit resources engage in more shadow banking activities, which preliminarily confirms the existence of the financial resource curse. Moreover, this effect is pronounced in firms located in regions with high credit marketisation and firms with bank connections. However, this effect is weakened in firms with strong internal governance and external supervision, and SOEs. Finally, additional analyses reveal that active participation in shadow banking activities hinders low‐risk firms' long‐term growth, and receives unfavourable market feedback.