Are Shadow Banking Activities Always Bad? Evidence from Nonfinancial Firms’ Private Equity Placements

We investigate how the market evaluates nonfinancial firms that recently bought wealth management products (WMPs) when raising equity capital. Using a sample of Chinese firms, we find that the stock market reacts less positively to private equity placements (PEPs) by firms that recently purchased WMPs than to those that did not. Further analysis suggests that compared with retail investors, sophisticated (i.e., institutional and high-net-worth) investors pay a higher price for the shares of these WMP-buying firms. After PEPs, we find that the long-term operating performance and firm value of WMP-buying firms are higher than those of non-buying firms. Overall, the findings suggest that: (i) engaging in shadow banking activities (buying WMPs) does not mean a firm is inferior, and (ii) sophisticated investors are less concerned than retail investors about a firm’s shadow banking activities.