Financial Development,Financial Marketization And Capital Misallocation:The Empirical Analyses Of China's Province And Sector Levels

Finance is one of the most significant driving factors in modern market economy.A diversified,multi-level and well-structured financial system can benefit lots of investing and financing entities.On the one hand,financial development and financial marketization are conducive to promoting residents' investment and stimulating economic growth.On the other hand,excessive development may directly or indirectly waste resources,curb savings,foster speculation,and result in inadequate investment and misallocation of scarce resources.The heterogeneity and uniqueness of the regions and sectors results in different ways to allocate capital.How to allocate capital rationally across regions and sectors is a problem that every country must solve by its own way to stimulate economic development.This study investigates how financial development and financial marketization affect the allocation of capital across regions and sectors in China.First,following the approach proposed by Aoki(2012),we compute misallocation coefficients for capital and labor inputs for 30 provinces from 2001 to 2017,and 37 sectors from 1981 to 2010 respectively from the perspectives of whether there are any frictions or not and profit maximization.Then,this study uses the corresponding time-span panel data to examine the non-linear relationships among provincial(sectoral)financial development,financial marketization and capital misallocation.In the aspect of provincial study,we find out financial development has an Inverse U-shape effect on provincial capital misallocation,and financial marketization has a U-shape effect on the degree of capital misallocation.And,it can decrease the degree of capital misallocation that the growth of capital stocks and financial development,the growth of capital stocks and financial marketization,and financial development and financial marketization improve together.Besides,it is found in sector level research that with the advancement of financial development and financial marketization,industries more dependent on external financing lead to higher degree of sectoral capital misallocation,whereas industries with high R&D expenditures or high capital investment benefit most from a more sophisticated financial sector,which can reduce the degree of sectoral capital misallocation.Also,we find out the similar results in both province and sector levels that the presence of a non-linear relationship between capital accumulation and capital misallocation that depends on the level of financial development and financial marketization.If the levels of financial development and financial marketization are low,faster capital accumulation is associated with a deterioration of allocative efficiency.However,this effect is non-linear and vanishes(and even reverses)at higher levels of financial development and financial marketization.In addition,this study also constructs dynamic panel models,then performs Difference GMM Two-step Estimation and System GMM Two-step Estimation,and finds that there is inertia in the degree of capital misallocation.This paper examines the non-linear effects among financial development,financial marketization and capital misallocation,which enriches domestic research theories on finance and allocation of capital.Meanwhile,it provides a new policy basis for optimizing capital allocation among regions and sectors,reducing the degree of capital misallocation in China,and promoting stable and rapid economic development.