Banking regulation and corporate R&D investment: Evidence from regulatory penalties in China

Abstract

Utilizing data from administrative penalty announcements by the former China Banking and Insurance Regulatory Commission (CBIRC), we analyze the impact of banking regulatory penalties on corporate R&D investment. Our findings indicate that stringent regulatory penalties crowd out corporate R&D investment by reducing the availability of loans and increasing borrowing costs, with a particularly pronounced effect of disciplinary actions and disqualifications, economic penalties, and loan-related penalties. Further analysis reveals that the crowding-out effect is more pronounced among firms with smaller asset sizes and lower internal financing. However, bank competition and international expansion significantly mitigate this crowding-out effect. Additionally, we find that regulatory penalties only crowd out R&D investment within the year following the penalty, with no direct evidence indicating a reduction in patent applications. Our study highlights that rigorous banking regulatory penalties may have a short-term adverse impact on corporate R&D investment, suggesting that regulatory authorities should balance the stability of the financial system with the development of the real economy when enforcing punitive actions.