Does Banking Deregulation Promote Corporate Investment Efficiency? Evidences From the Entry of City Commercial Banks in China

ABSTRACT This study empirically analyzes the effects of banking deregulation on corporate investment efficiency in China. By introducing the first deregulation on city commercial bank entry and exploiting a staggered difference‐in‐difference regression model, we find that the entry of city commercial banks significantly promoted the overall investment efficiency of firms located in cities that implemented this deregulation. It mainly alleviated the underinvestment problem and, however, had little impact on the overinvesting firms. The cross‐sectional analysis indicates that the effects were more pronounced for financially constrained firms, including non‐SOEs, SMEs, and firms with strong dependence on external finance. We explain these findings by investigating whether the entry of city commercial banks alleviated the financing constraints of firms and find that following the deregulation, the financially constrained firms experienced a substantial increase in their access to long‐term bank loans, as well as a drop in the investment‐cash flow sensitivity.