The relationship between financial development and financing constraints in China

Abstract

Against the backdrop of the ongoing evolution of China’s financial system, persistent information asymmetry, and uneven allocation of financial resources, this thesis draws on information asymmetry theory and financial development theory to develop testable hypotheses and conducts an empirical investigation. Using a dataset of 4832 non-financial A-share listed firms in the Shanghai and Shenzhen stock exchanges over the period 2011 to 2022, the study examines the relationship between macro-level financial development and micro-level corporate financing constraints. It further explores the underlying mechanisms through the investment–cash flow sensitivity framework. In addition, given the long-standing ownership bias and size-based discrimination in China’s financial system, the analysis investigates heterogeneity in this relationship along two dimensions, namely ownership structure which distinguishes state-owned firms from private firms, and firm size which differentiates small and medium-sized firms from large firms.