How does non-financial firms' systemic risk affect their credit constraints? Evidence from China

Abstract

While non-financial firms (NFFs) face growing vulnerabilities and enhanced interconnectedness, their systemic risk implications remain understudied compared to those of financial institutions like banks and insurers. Going beyond the existing literature, this study focuses on the systemic risk of NFFs and further reveals its effects on these firms' credit constraints. Using firm-level systemic risk data and financial data from Chinese non-financial listed firms from 2007 to 2021, we find that higher systemic risk in NFFs reduces access to bank credit, increases borrowing costs, and shortens credit maturities, thereby leading to tighter credit constraints. Systemic risk in NFFs exacerbates credit constraints through increased information asymmetry, higher probabilities of financial distress, and risk spillovers. These findings highlight the importance of systemic risk in predicting corporate financial distress and real economic weakness and its significance in banks' assessments of corporate solvency and credit risk.