Shadow price of equity and political connectedness: A study of Chinese commercial banks

This study estimates the shadow price of equity capital applying a directional distance function for Chinese commercial banks. Using an unbalanced panel of 746 observations from 2013 to 2019, we find that the average shadow price of equity in the Chinese banking system is 2.94%. Moreover, in our sample, the price of equity of most banks is lower than that of deposits, suggesting that the majority of sampled banks are underleveraged during the study period. We also find that politically connected banks have higher prices of equity than their non-politically connected counterparts, and that the price of equity is positively related to ownership concentration. Furthermore, large politically related banks tend to have lower shadow prices of equity than large non-politically related banks, although large banks usually have higher prices of equity than small banks.