Does bank profitability matter for firm productivity? - evidence from China

The role of financial development has garnered significant attention. However, the pro-cyclicality of financial development has emerged as a contentious issue, especially in the aftermath of the financial crisis. The micro-level impact of bank profitability on economic growth remains a topic of ongoing debate with inconclusive evidence. This study investigates the impact of bank profitability on firm productivity using a panel dataset comprising 131,021 firm-year observations, derived from microdata of industrial firms and banks. Our findings suggest that bank profitability diminishes the total factor productivity of firms by encouraging financialization, which in turn displaces productive investment, and attracts high-quality labor from firms to the banking sector. These consequences are particularly evident in firms located in central and eastern regions, as well as in foreign and private firms. Additionally, the impact is more pronounced in state-owned banks and large-scale banks, whereas high-technology firms and state-owned firms appear to be less affected. These findings emphasize the potential detrimental implications of excessive bank profitability on firm productivity, shedding light on crucial factors related to financialization, investment, and labor distribution. Policymakers are urged to meticulously assess these repercussions to achieve equilibrium between the financial sector and the real economy, thereby fostering sustainable economic growth.