Financial Openness, External Finance Dependence, and Firms’ Financing Costs: Evidence from Chinese A-Share Listed Firms

Abstract

Based on firm-year panel data of Chinese A-share listed firms from 2007 to 2017, this paper examines the relationship among financial openness, external finance dependence, and firms’ financing costs. The results show that the interaction term between financial openness and external finance dependence significantly reduces firms’ financing costs. This indicates that the financing cost effect of fi-nancial openness is not simply reflected in a general decline in average terms, but is closely related to the degree of firms’ dependence on external finance. Further subsample tests show that the interaction term is significantly negative for firms with high external finance dependence, while the estimated direction is opposite for firms with low external finance dependence. This suggests that the effect of financial openness on firms’ financing costs is conditional and asymmetric. The main conclusion remains valid after replacing the measure of financial openness, using the share of foreign banks, excluding the financial crisis years, controlling for internal finance dependence, and excluding the leverage control variable. This paper adds to the literature on the microeconomic effects of financial openness from the perspective of firms’ financing costs. It also highlights that firms’ financ-ing structure is an important dimension for understanding the effects of financial openness policies.