Regional digital finance and inefficient corporate investments: Empirical evidence from China

Abstract

Using data of 1,457 Chinese A-share listed enterprises from 2012 to 2021, this study investigates the impact of regional digital finance development on inefficient corporate investments. Data for core explanatory variables, including Digital Finance and Breadth, were obtained from the Peking University Digital Finance Research Center, while firm-level variables’ data were sourced from CSMAR. The baseline results show that regional digital finance development significantly reduces inefficient corporate investments in China. These findings are further supported by a series of robustness tests. Additionally, we identify two mechanisms through which regional digital finance development mitigates inefficient corporate investments: alleviating financing constraints and increasing cash flow circulation. The mitigation effects of digital finance are more pronounced in state-owned firms, firms with strong governance, firms located in western regions, firms in areas with a high degree of marketization, and firms in innovative and competitive industries. Overall, this study offers significant insights for developing countries, suggesting that regional digital finance development can enhance firms’ resource allocation efficiency.

Keywords

• Digital finance
• inefficient corporate investments
• under-investments
• over-investments
• financing constraints
• cash flow circulations