Navigating competitive pressures: The impact of banking competition on corporate short-term borrowing for long-term investment

Abstract

This study investigates how banking competition affects corporate debt maturity decisions, particularly focusing on the phenomenon of short-term borrowing for long-term investments (STBLI) in the context of China's evolving banking sector. The rapid expansion of banking competition, driven by the increasing number of bank branches and increased financial access, has alleviated firms' reliance on short-term borrowing by extending loan tenure and reducing financing costs. Using a dataset of 31,583 nonfinancial listed companies from 2008 to 2022, the study employs geographical modeling to quantify banking competition and assess its impact on firms' financing strategies. The results show that increased competition, measured by the number of bank branches, significantly reduces the STBLI, particularly in areas with higher banking competition intensity. The study further explores the mechanisms through which banking competition alleviates financing constraints, lowers borrowing costs, and extends debt maturities, thereby mitigating the risks associated with STBLI. The findings highlight the heterogeneous effects of banking competition across different firm types, regional contexts, and bank characteristics, offering valuable insights into how banking competition influences corporate financing decisions. Additionally, the study demonstrates that intensified banking competition leads to improved long-term corporate performance by reducing the adverse effects of the STBLI.