Stock Market Liberalization and Capital Misallocation

Xiaoxue Zhao () and Abigail Hornstein ()
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Xiaoxue Zhao: Department of Economics, Wesleyan University
Abigail Hornstein: Department of Economics, Wesleyan University

No 2025-007, Wesleyan Economics Working Papers from Wesleyan University, Department of Economics

Abstract: China’s 2001 stock market reform ended the administrative quota system for public listings, which had favored provinces with more state-owned firms. This reform led to a significant leveling of firms’ probability of listing across provinces. Firms that got a higher boost in their listing probability increased assets and investments and reduced financial costs and marginal revenue product of capital. Thus, this reform significantly improved capital allocation efficiency, even among unlisted firms. We identify equity market liberalization as a key institutional lever that drives reduced capital misallocation and thus contribute to debates on financial development and economic efficiency in emerging markets.

JEL-codes: G23 G38 O12 O16 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2025-07
New Economics Papers: this item is included in nep-fdg
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