Fin-tech Development and Corporate Financing Constraints: Evidence from the Debt Cost Channel

Abstract

Using a panel of Chinese A-share listed firms from 2011 to 2020, matched with the Peking University Digital Financial Inclusion Index at the prefecture-city level, this paper examines whether fin-tech development eases corporate financing constraints and through which channels. In the specification with firm and year fixed effects, fin-tech development is significantly associated with a lower KZ index. This finding remains significant when standard errors are clustered at the city level, where fin-tech development varies.

The mediation analysis shows that fin-tech development significantly lowers firms’ debt costs and that lower debt costs, in turn, ease financing constraints. Once debt cost is included, the direct effect of fin-tech is no longer statistically significant, which is consistent with full mediation. Fin-tech development is also associated with local bank competition, but this channel does not significantly reduce financing constraints. The results remain robust after excluding financially distressed firms and firms in the financial and real estate industries, as well as under a coarser specification with industry and year fixed effects. The evidence is weaker when the SA index is used because firm fixed effects leave little variation within firms for identification. Overall, the results identify debt cost, rather than bank competition, as the main channel through which fin-tech development eases corporate financing constraints.