Digital financial supervision and inefficient investment of enterprises: Evidence from China's internet financial industry

This article examines the impact of China's digital financial supervision policy, specifically the Chinese Plan to Implement Special Rectification Work on Internet Finance Risks, on companies involved with the fintech business. This study constructs an internet finance dictionary from annual reports to identify companies involved in the internet finance business. We examine the impact of the policy on inefficient corporate investments using a difference-in-differences approach. We find that the policy reduces the inefficient investments by companies involved in the internet finance business from 2013 to 2019 and addresses in particular the problem of underinvestments. Mechanism analysis reveals that the policy primarily alleviates the principal-agent problem, reducing the "crowding-out effect" of the internet finance business on other investments and reducing inefficient investments. The additional dynamic analysis results demonstrate that the policy's effectiveness gradually strengthens after policy implementation, thereby continuously exerting a positive impact on corporate operations.