China’s Leverage Paradox, Collective Action Logic and Systematic Financial Risk

Abstract

The existing research on China’s leverage paradox focuses only on the real sector, and it only considers the liquidity leverage paradox. Taking into account the situation both of real and financial sectors, the panel date regression analysis based on China’s listing companies shows that there is liquidity leverage paradox in the real sector, but there is no scale leverage paradox in the real sector. There is no liquidity leverage paradox in the financial sector, but there is scale leverage paradox in the financial sector. The essence of the leverage paradox is the collective action paradox caused by the enterprise’s risk-taking behavior preference. To eliminate the paradox of collective action in the real sector, it needs to encourage innovating so as to improve the heterogeneity of enterprises. To eliminate the paradox of collective action in the financial sector, it needs to reduce the hidden guarantees of the government and the external effects of the behavior of financial institutions. From the point of view of preventing systemic financial risks, even if there is a weak liquidity leverage paradox effect in the whole economy, it is not appropriate to reduce the leverage of the whole society by creating an environment of high-speed monetary growth.