Capital Allocation Efficiency Research Articles

IPO suspensions and labor employment decisions: Evidence from China

The Chinese regulator occasionally suspends all initial public offerings (IPOs) to maintain stability in the capital markets and facilitate capital market reform. These suspensions temporarily prevent firms that have obtained IPO approval from going public. We hypothesize that this suspension-induced listing delay influences firms’ labor employment decisions. Consistent with this argument, we find that a suspension-induced listing delay is associated with an increase in labor costs, both in terms of total and average employee payments. This positive relationship is more pronounced for human capital-intensive firms and non-state-owned enterprises. We also find that there is an increase in employment and employee turnover for firms facing suspension-induced listing delays. Moreover, IPO suspensions result in lower labor productivity and firm performance. Overall, our results indicate that government policy uncertainty leads firms to incur high labor costs and reduces capital allocation efficiency.

Can public data availability affect stock price crash risk? Evidence from China

In the era of the digital economy, data has emerged as a critical factor of production. The exploration of methods to unlock the economic value inherent in the vast reservoirs of public data held by the government has now begun to draw the attention of scholars. However, little research has considered this issue from the perspective of financial market stability. Leveraging the staggered establishment of public data open platforms (PDOPs) across different cities of China and employing the staggered difference-in-differences (DID) model, we find that the establishment of PDOPs significantly decrease local firms' stock price crash risk (SPCR). Our results remain valid after various robustness tests, such as placebo tests, entropy balancing analysis, alternative measures of SPCR, as well as alternative difference-in-differences (DID) estimators. Furthermore, additional evidence suggests that the observed effects are driven by two mechanisms: improved operating performance and enhanced external monitoring. The former mechanism reduces the generation of bad news within firms, while the latter restricts managers' ability to hoard bad news. Further research findings show that the motivation of management to withhold bad news and the nature of firms' property rights are important factors affecting the relationship between public data availability and SPCR. Overall, our findings suggest that government can help improve capital market resource allocation efficiency by supplying public data to market participants.

The impact of digitalization on the efficiency of innovation factor allocation: from the perspective of factor flow

ABSTRACT The quick progress of digitalization has caused profound impacts on innovation activities. However, the impact and mechanism of digitalization on the efficiency of innovation factor allocation remain to be discussed. This study extends Brandt’s misallocation framework to the field of innovation and measures the efficiency of innovation factor allocation in China from 2011 to 2021. Then we empirically study the impact of digitalization on the efficiency of innovation factor allocation and intensively analyse the mechanism and heterogeneous effects. The results show that digitalization significantly and positively impacts the efficiency of innovation factor allocation. In particular, the promotion effect on the efficiency of innovation capital allocation is more obvious. The flow of innovation factors is an important transmission mechanism for digitalization to promote the efficiency of innovation factor allocation. The heterogeneity tests show that the impact of digitalization on inland areas and areas with overallocation of innovation factors is not obvious. This study constructs an analysis framework from the perspective of factor flow and tests the heterogeneous effects of digitalization on the efficiency of innovation factor allocation. Our findings have important implications for how to comprehensively improve the efficiency of innovation factor allocation in the digital era.

Friendly boards and capital allocation efficiency

AbstractThis study examines the effect of friendly boards on capital allocation efficiency. We provide evidence that firms with friendly boards have a positive and statistically significant effect on capital allocation inefficiency. We find our results robust to different measures of friendly boards and capital allocation inefficiency, alternative model specifications, omitted variable bias, self‐selection bias and other endogeneity concerns. We also show that the positive association between friendly boards and capital allocation inefficiency is lower in firms with high external corporate governance quality but higher in firms with high financial constraints. The findings imply that poor board monitoring and high agency conflicts in firms with friendly boards lead to high capital allocation inefficiency.

Platform-Provided Disclosure on Investor Base and Entrepreneurial Success: Evidence from Crowdfunding

ABSTRACT We employ a sharp regression discontinuity design to identify the causal effects of investor-base disclosure (IB DISCLOSE) on funding outcomes and entrepreneurship success. Since February 2016, Kickstarter has disclosed IB information, namely, backer statistics including geographic locations and previous funding experience of the backers, once the number of backers for a project reaches ten. Exploiting this discontinuity, we show the disclosure increases the likelihood of funding success by 10 percent and the amount of funds pledged by 13 percent. The effect is more pronounced when the project quality is high and for projects with less credible creators, high ex ante uncertainty, high information asymmetry between creators and backers, and high financial costs to backers. We also find IB DISCLOSE increases the likelihood of product delivery. Our study highlights the importance of platform-provided disclosure in improving the efficiency of capital allocation. JEL Classifications: M41; G24; L15; O31; D04.

ESG and green Innovation

In recent years, with the growing emphasis on environmental protection and sustainable development in society, comprehensive green transformation has emerged as a prominent trend in economic and social development. This transformation not only enables enterprises to achieve sustainable development but also captivates the attention of an increasing number of investors. By analyzing the panel data of listed companies between 2011 and 2021, we found that outstanding ESG performance plays a pivotal role in promoting green technology innovation among enterprises. Within this process, financing constraints serve as a crucial intermediary. This research outcome offers valuable references for promoting green development initiatives among enterprises, enhancing the disclosure system of social responsibility information, and optimizing the efficiency of capital market allocation..

Assessing capital allocation efficiency under environmental regulation

Utilizing data from 2010 to 2021 from listed firms, this study examines the relationship between environmental regulation and capital allocation efficiency. The empirical findings reveal that the implementation of carbon emissions trading scheme pilots plays a pivotal role in diminishing capital misallocation within firms. This effect is more pronounced in state-owned enterprises, firms facing high financial constraints, those operating in highly competitive markets, and organizations that are not part of the high-tech or high-pollution industries. These findings highlight the significant role of macro-level environmental regulations in improving micro-level organizational capital efficiency.

Green Technology Innovation, Capital-Factor Allocation, and Manufacturing-Export Resilience

Green technology innovation, with its two-fold benefits of protecting the environment and promoting economic growth, is an increasingly necessary strategy for China’s manufacturing exports. This study examines the impact and mechanisms of green technology innovation on China’s manufacturing-export resilience in the aftermath of the 2008 global financial crisis. The study findings demonstrate that green technology innovation considerably boosts manufacturing-export resilience. Specifically, green technology innovation enhances manufacturing-export resilience by improving capital allocation efficiency. This is especially significant in the high labour-mismatch region and the eastern–central region. It is worth noting that the impact of green technology innovation on manufacturing-export resilience is negatively regulated by intellectual-property protection, as well as being subject to the single-threshold effect of government intervention. That is, reinforcing intellectual-property protection inhibits the upgrading effect of green technology innovation on manufacturing-export resilience, and the effect of green technology innovation on manufacturing-export resilience becomes insignificant when the government intervention goes beyond a certain level.

Does the energy-consuming right trading system promote green technology innovation of enterprises?

To achieve the high-quality economic development, China implemented the energy-consuming right trading system, aiming to leverage market-oriented environmental regulations to drive enterprises’ green transformation. The purpose of this paper is to figure out whether the energy-consuming right trading system has promoted the green technology innovation of enterprises. Using the empirical analysis method, the paper samples 718 listed industrial enterprises from 2014 to 2019 and constructs a DID model to assess the impact. The results indicate a significant promotion of green technology innovation by the trading system. Non-state-owned and non-high-energy-consuming enterprises exhibit greater sensitivity to the energy-consuming right trading system. Additionally, the institutional environment plays a regulatory role in promoting green innovation of enterprises. Furthermore, it is found that the energy-consuming right trading system influences enterprises by enhancing capital allocation efficiency. The findings are valuable for the government in shaping energy policies and fostering the green transformation of enterprises.

How does air pollution affect capital allocation efficiency?

As China seeks to transition to a high-quality economic development model, improving its capital allocation efficiency serves as a means to revitalize the capital stock and facilitate a shift from an investment-driven growth approach to an innovation-driven one. By exploring the relationship between air pollution and capital allocation efficiency, new avenues for promoting high-quality economic development can be identified. This paper develops a theoretical analysis framework that posits the mechanisms by which air pollution affect capital allocation efficiency through innovation activities and human capital channels. Based on the data from prefecture-level cities in China from 2003 to 2019, this paper introduces an innovative method to evaluate capital allocation efficiency. Further, using a panel two-way fixed-effects model to examine the impact of air pollution on capital allocation efficiency and its mechanisms. The findings show that ① the intensification of air pollution reduces capital allocation efficiency and the above findings pass the robustness tests. ② The results of heterogeneity analysis show that there is significant heterogeneity in the effect of air pollution on capital allocation efficiency. The intensification of the air pollution significantly inhibits capital allocation efficiency in inland areas, small and medium-scale cities, after 2013, and in areas with high foreign economic dependence. ③ The results of mechanism analysis shows that the intensification of the air pollution will inhibit capital allocation efficiency by suppressing innovation activities and human capital accumulation channels.

Retracted: Relationship between Capital Allocation Efficiency and Diversification Strategy from the Perspective of Internal Control

Retracted: Relationship between Capital Allocation Efficiency and Diversification Strategy from the Perspective of Internal Control

Accounting Uniformity, Comparability, and Resource Allocation Efficiency

ABSTRACT Uniformity is an essential feature of financial reporting, yet its desirability has long been debated. We study a model in which firms decide whether to adopt either their locally preferred accounting methods or a common method, followed by an investor allocating capital across firms. Firms’ choices of a common method are strategic complements in attaining more comparable reports. As a result, multiple equilibria may exist. Specifically, an equilibrium in which firms use their local methods always exists. However, an equilibrium in which firms adopt a common method exists if uniformity improves comparability significantly and firm-specific productivity shocks are large relative to the common productivity shock. Firms may fail to coordinate on adopting the Pareto-dominant accounting method, which may not even emerge as an equilibrium if investments exhibit substitutability. These coordination problems provide accounting regulation an opportunity to facilitate efficient capital allocation, thus providing a microfoundation for accounting measurement regulation. JEL Classifications: D02; D61; D83; H11; M40; M41; M48.

Tax Incentives, Factor Allocation and Within-Firm Pay Gap: Evidence from a Quasi-Natural Experiment in China

ABSTRACT This paper investigates the effect of China’s accelerated depreciation policy on within-firm pay gap. We exploit a firm-level panel data from China’s A-share listed companies and estimate the policy effects by constructing a difference-in-differences model. Results show that the accelerated depreciation policy significantly increases the within-firm pay gap of firms of pilot industries than those of non-pilot industries, and this finding continues to hold after accounting for other contemporaneous shocks and is robust to a battery of robustness checks. Our mechanism tests demonstrate that, the rank-and-file employees replaced by the use of capital rather than executives, dominates the positive nexus between within-firm pay gap and accelerated depreciation policy. This effect is more pronounced for firms with higher tax burden, stronger financing constraint and higher capital intensity. We also find that China’s accelerated depreciation policy improves overall capital allocation efficiency and labor allocation efficiency. Our findings provide a deep understanding of the link between tax incentives and within-firm pay gap, especially from the perspective of factor allocation.

ESG Performance and Corporate Resilience: An Empirical Analysis Based on the Capital Allocation Efficiency Perspective

As China transitions from high-speed to high-quality economic development, the concept of sustainable development, particularly environmental, social, and governance (ESG), has emerged as a crucial consideration in corporate decision-making. This study examines the relationship between ESG performance and corporate resilience through the lens of capital allocation efficiency. Employing a fixed-effects model, heterogeneity analysis, and a mediation effect model, we analyzed 4436 A-share listed companies that were rated according to ESG standards by the China Securities Index (CSI) between 2011 and 2021. Our findings suggest that: (1) ESG performance positively impacts corporate resilience. (2) The magnitude of this effect varies based on the ownership structure and industry. Specifically, ESG performance has a more significant influence on non-state-owned companies and manufacturing companies. (3) Improving ESG performance can enhance corporate resilience through three mechanisms: reducing financing costs, improving investment efficiency, and improving operational efficiency.

Stock market liberalization and corporate investment revisited: Evidence from China

Recent reform in China has made a subset of Chinese stocks available to foreign investors, partially opening up China's stock market. Our difference-in-differences analysis shows that this liberalization reform boosts investments in investable firms relative to noninvestable ones, with results robust to various sensitivity analyses. Besides capital inflows and risk sharing, a potential but underexplored channel is improved corporate governance due to direct and indirect pressures from foreign investors, which lowers the cost of capital and improves capital allocation efficiency. Consistent with this corporate governance channel, we find that the liberalization reform reduces investable firms’ agency costs, increases their investment efficiency and total factor productivity, and improves their operating performance. Further analysis finds that the positive investment effect from the liberalization reform is stronger among firms that were poorly governed before the reform.

Can digitalization empowerment improve the efficiency of corporate capital allocation? —Evidence from China

In the digital economy era, digital empowerment is a crucial measure to enhance capital allocation efficiency (CAE). To examine the effect of digital empowerment on CAE, we conducted a study using Chinese listed firms as a research sample. Our findings indicate that (1) Digital empowerment significantly enhances the CAE. (2) Digital empowerment improves the CAE in enterprises by reducing agency costs and enhancing operational capabilities. (3) This effect is even more pronounced in non-state-owned enterprises, enterprises with low leverage, and those with weak levels of external oversight. (4) Further research suggests that digital empowerment leads to a reduction in under investments and reduces operating investments. The research in the article provides a theoretical framework for enterprises to enhance CAE and governance level. It also offers policy insights for promoting effective digital transformation of businesses and presents valuable references for advancing digital economy in China.

Dynamic evolution and impact mechanism of human capital mismatch in strategic emerging industries: Evidence from the Yangtze River Delta region of China

China's “demographic dividend” has gradually disappeared since 2013, but the problem of human capital mismatch prevails in various industries and sectors, and improving human capital mismatch and optimizing the allocation of human capital has become an important measure for high-quality economic development. This study uses panel data at the provincial level in the Yangtze River Delta region from 2012 to 2021 and employs spatial econometric models to quantitatively analyze the index of human capital mismatch, the impact mechanism, and spatial interaction effects in strategic emerging industries. The results show that the spatial agglomeration and dependence of human capital mismatch decreased in the Yangtze River Delta region, and the index of human capital mismatch in strategic emerging industries is generally insufficient. The shortage of talent supply within industries is particularly severe in high-end equipment manufacturing and biotechnology industries. Second, fiscal subsidies have exacerbated human capital mismatches in both local and neighboring areas, with significant spatial spillover effects. Urbanization has exacerbated local human capital mismatches but has improved the degree of human capital mismatch in neighboring areas. The index of industrial structural adjustment is generally conducive to alleviating human capital mismatches. Distorted markets and financial levels have accelerated human capital mismatches by distorting the efficiency of human capital allocation. Third, regional heterogeneity significantly influences the spatial interaction effects of human capital mismatches. This study contributes to improving the situation of human capital mismatch in strategic emerging industries in the Yangtze River Delta and provides theoretical and policy recommendations for local governments.

Creditor protection and labor investment efficiency: Evidence from China

This paper examines how strengthened creditor protection affects the real economy in view of labor investment efficiency. Exploiting the implementation of the enterprise bankruptcy law and the property law in 2007 as quasi-exogenous shocks, we find that strengthened creditor protection can reduce the deviations of labor investment from the level justified by economic fundamentals, i.e., improve labor investment efficiency. The improvement in labor investment efficiency is largely driven by the alleviation of overinvestment in labor due to under-firing. The main results are more pronounced for non-state-owned enterprises with more intermediate layers and state-owned enterprises with fewer intermediate layers in the pyramid control chains. Our overall findings indicate that strengthening creditor protection through upgrading the legal system can improve the efficiency of human capital allocation.

Digital finance and regional economic resilience: Evidence from 283 cities in China

Digital technology provided a new driver for the rapid recovery of the global economy in the post-COVID-19 era. This study examined how digital financing affected regional economic resilience. First, this study constructs a multidimensional regional economic resilience evaluation system and measures the economic resilience levels of 283 Chinese cities for 2012-2021–using the entropy value method. Then, panel data, mediation effect, and threshold effect models were constructed to empirically test the impact mechanism of digital finance (DF) on regional economic resilience. The results show that DF improves regional economic resilience, which is more evident in central and western cities. Capital allocation efficiency, regional innovation, and regional consumption are effective paths, whereas DF affects regional economic resilience by enhancing capital allocation efficiency, strengthening regional innovation capacity, and promoting resident consumption. It is worth noting that excessive financialization can mask the role of DF. These conclusions provide new evidence clarifying the role of DF in promoting rapid economic recovery in the post-COVID-19 era.

The interplay of financial reporting quality and investment efficiency: evidence from the USA

Purpose This study aims to comprehensively examine the relationship between financial reporting quality (FRQ) and investment efficiency (IE). The central thrust of this research endeavor is to empirically analyze the impact of FRQ on diverse facets of investment, including overinvestment, underinvestment and overall IE. Design/methodology/approach Using a sample of 13,902 firm-year observations from publicly listed US companies, this study uses the generalized method of moment (GMM) in conjunction with three distinct measures for FRQ under three different investment settings, considering firm liquidity and industry performance. Findings This study offers interesting insights into the intricate relationship between FRQ and IE. The results indicate a strong positive relation between the two constructs. In particular, the research reveals a negative link between FRQ and underinvestment, and an inverse relationship between FRQ and overinvestment. These findings suggest that FRQ is one of the key drivers of IE and that by enhancing FRQ, businesses can better optimize their investments. Practical implications This study highlights the significant implication of the effect of FRQ on IE, as it enables businesses to optimize their investments by improving their decision-making processes and better risk assessment of associated projects, resulting in more efficient capital allocation. A higher degree of FRQ increases investors’ confidence in a company’s financial statements, resulting in higher liquidity. It can benefit regulators to set higher standards and promote transparency. Originality/value The study examines the relationship between FRQ and IE. The study finds a strong positive relation between FRQ and IE, with FRQ being a key driver of IE. The paper’s original contribution lies in its comprehensive examination of the complex relationship between FRQ and IE, using robust analytical techniques by applying GMM and taking into consideration firms liquidity and industry performance.