Financial constraints, capital misallocation and firm’s total factor productivity (TFP) loss – empirical evidence from listed manufacturing companies in China

Based on the theoretical mechanism that ‘financing constraints (investment-cash flow sensitivity) → capital misallocation → firm’s total factor productivity’ and ADL(2,2) model, implied cost model, total factor productivity model, panel regression model and mediation effect model, we empirically investigate the impact of financing constraints on TFP loss and the mediating effect of capital misallocation. Finance and market transaction data for manufacturing companies listed on Shanghai and Shenzhen stock exchanges during 2009–2019 are used in the empirical study. Chinese manufacturing companies were shown to have investment-cash flow sensitivity. The empirical analysis proved that financing constraints not only have direct negative impact on the firm’s TFP directly but also negatively affect the TFP by the mediating effect of capital misallocation. Moreover, firm heterogeneity analysis showed that the above two impacts were greater for non-stated owned firms, small and medium-sized firms, and young firms than stated-owned firms, big firms and mature firms.