Financial Structure and Capital Allocation Efficiency: An Empirical Analysis of China from 2005–2018

ABSTRACT

In this study, we explore the relationship between financial structure and the efficiency of capital allocation to determine a scientific and effective approach to transform and upgrade China’s financial sector. Using China’s provincial data from 2005 to 2018, we detected the threshold effect of financial structure on capital allocation efficiency. We found that financial structure, when using its three agency indicators (credit scale, insurance scale, and stock market size) as threshold variables, and capital allocation efficiency show an inverted ‘U’ relationship. Moreover, the relationship between financial efficiency, insurance scale, and capital allocation efficiency changes from negative to positive, and the relationship between foreign trade scale and capital allocation efficiency shows a significant negative correlation. This research improves the understanding of the relationship between China’s financial structure and the efficiency of capital allocation. Our results show that by optimizing the financial structure through expanding the stock market and the scale of bank credit and appropriately expanding the scale of insurance, more loanable funds will flow into the production sector, and providing certain guarantees can greatly promote improved capital allocation efficiency.

KEYWORDS:

• Financial structure
• capital allocation efficiency
• economic growth
• threshold regression

JEL CLASSIFICATION:

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Declarations of interest

None.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71673082,71703073,71804001,71934001]; Planning Project of Philosophy and Social Science Research in Anhui Province [AHSKQ2017D03].