Enterprise Risk, Not Policy: Determinants of Financing Costs in China

Abstract

This study examines the impact of abolishing loan-to-deposit ratio (LDR) restrictions on corporate financing costs in China. Using panel data and a difference-in-differences approach, we find that removing LDR constraints did not significantly reduce financing costs. Instead, firm-specific risk factors, particularly leverage ratios, emerged as the primary determinants. Moreover, firms in cyclical industries faced higher financing costs compared to non-cyclical industries. Our findings highlight the need for targeted policies to address financing challenges, especially for firms in cyclical sectors.