How do banks finance firm innovation: evidence from syndicated loans in China

This study examines the relationship between syndicated loans and firm innovation in China with a detailed loan-firm-level dataset from Dealscan. The results revealed that the research and development investment for firms that obtained syndicated loans increased by 14.6% in the following fiscal year compared to those that did not. Such effects persist across various robustness checks. The promotion effect of syndicated loans on firm innovation works through two mechanisms: the signalling effect and the efficiency effect. Further analysis suggests that lender characteristics such as being large-scale, having foreign ownership, and having expertise in syndication could further strengthen the positive effect. Moreover, the impact of syndicated loans is more pronounced for financially constrained firms that lack banking relationships. Furthermore, we find that the expansion of syndicated lending within an industry is associated with a positive spillover effect, fostering innovation in non-recipient firms. Our findings highlight the critical role syndicated loans play in alleviating credit rationing problems and stimulating innovation.