Financial decentralization and corporate risk: evidence from China

Financial decentralization grants local governments greater authority over financial resources to stimulate regional economic growth; however, it may also generate disparities. This study investigates the effect of financial decentralization on corporate risk in China. We develop a theoretical decision model that incorporates risk assessment into the credit evaluation processes of banks and firms, explicitly accounting for the influence of financial decentralization. The restructuring of rural credit cooperatives provides a quasi-natural experiment for financial decentralization, and we employ a multi-period difference-in-differences approach using data from 273 cities between 2007 and 2018. The results reveal that financial decentralization increases corporate risk, with the effect being particularly pronounced in regions with stronger fiscal decentralization, in non-key industries, and among private enterprises. Smaller and less profitable firms are especially vulnerable. Mechanism analysis further shows that financial decentralization marginalizes alternative financial institutions, such as state-owned bank branches, thereby restricting firms’ access to loans unless collateralized. These findings suggest that financial decentralization weakens financial competition and reduces the efficiency of capital allocation. Overall, this study underscores the need for stronger financial oversight and improved credit allocation policies to enhance stability and support more equitable economic development.