Abstract: This paper mainly studies the impact of the development of regional private finance on the investment behavior of private enterprises. Taking the private enterprises in China industrial enterprise database as the sample, we measure the development level of private finance based on the average scale of private loans in the regions where the enterprises operate. The empirical results show that the development of regional private finance can significantly alleviate the underinvestment of private enterprises, and will not lead to overinvestment of private enterprises. The effect is more pronounced in those firms that have higher degree of information asymmetry and more serious agency problems. The effect is also more pronounced when the financial constraint of enterprises is more severe or the regional social capital development is better. Further tests show that, the development of regional informal finance contributes to the future business performance of enterprises. Using the private finance reform policy as an exogenous shock, the DID regression results are consistent. Our findings enrich the literature on the usefulness of financial development from the perspective of private finance and supplement the research on the determinants of private enterprises’ investment behavior. It also provides policy implications to the reform of private finance.

Key words: private finance, investment behavior, underinvestment, financial constraints, social capital