The impact of imperfect financial markets and stock holdings on corporate innovation: Evidence from China

Abstract

According to previous research on developed countries, companies engaged in more corporate innovation are likely to have larger stock holdings. Companies are more likely to reserve stock holdings in a transitioning economy like China due to the prevalence of financial market flaws. This research suggests stock ownership and banking ties to the government as two alternative credit financing channels that Listed Chinese companies may employ to mitigate the effects of market imperfections by attracting foreign investment. Financial limitations can be efficiently mitigated through external finance facilitation channels (EFFCs) by lowering debtors and businesses have different levels of knowledge. However, the EFFC effect is diminishing due to the improved market environment brought about by China's ongoing financial reform. This research, therefore, considers potential avenues for reducing the EFFC effect, with practical policy implications for reforming China's financial markets to lower corporate innovation costs.