The Impact of Financial Development on Companies Financing Constraints: Evidence from China

Abstract

Empirical studies show that financial development can stimulate economic growth by relaxing companies financing constraints. As a series of financial reforms have been carried out by Chinese government over the past two decades, Chinas financial institutions and markets continue to develop. In this paper, I measure the impact of financial development on Chinese companies financing constraints by estimating the Euler investment equation using the micro-level panel data for 1052 Chinese manufacturing companies over nine years from 2007 to 2015. The size of financial institutions and stock market and stock market efficiency are indicators of financial development in the model. Financing constraints are measured by the sensitivity of investment to cash flow. In general, the more sensitive one companys investment is to its cash flow, the more significant financing constraints it is facing. I find that firstly Chinese companies still face financing constraints although Chinas financial system keeps developing. In the second place, non-SOEs are more financially constrained than SOEs but they also benefit more from financial development than SOEs. Lastly, financial depth has a large effect on the reduction in financing constraints. The impact of stock market efficiency on financing constraints is different from expectation because stock market turnover ratio is a poor proxy for the efficiency of Chinese stock market.