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The Misallocation of Finance

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  • TONI M. WHITED
  • JAKE ZHAO

Abstract

We estimate real losses arising from the cross‐sectional misallocation of financial liabilities. Extending a production‐based framework of misallocation measurement to the liabilities side of the balance sheet and using manufacturing firm data from the United States and China, we find significant misallocation of debt and equity in China but not the United States. Reallocating liabilities of firms in China to mimic U.S. efficiency would produce gains of 51% to 69% in real value‐added, with only 17% to 21% stemming from inefficient debt‐equity combinations. For Chinese firms that are large or in developed cities, we estimate lower distortionary financing costs.

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  • Toni M. Whited & Jake Zhao, 2021. "The Misallocation of Finance," Journal of Finance, American Finance Association, vol. 76(5), pages 2359-2407, October.
  • Handle: RePEc:bla:jfinan:v:76:y:2021:i:5:p:2359-2407
    DOI: 10.1111/jofi.13031
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    2. David, Joel M. & Schmid, Lukas & Zeke, David, 2022. "Risk-adjusted capital allocation and misallocation," Journal of Financial Economics, Elsevier, vol. 145(3), pages 684-705.
    3. Francesco Manaresi & Nicola Pierri, 2018. "Credit supply and productivity growth," Temi di discussione (Economic working papers) 1168, Bank of Italy, Economic Research and International Relations Area.
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    5. Andrea L. Eisfeldt & Yu Shi, 2018. "Capital Reallocation," NBER Working Papers 25085, National Bureau of Economic Research, Inc.
    6. Mr. Nicola Pierri & Francesco Manaresi, 2019. "Credit Supply and Productivity Growth," IMF Working Papers 2019/107, International Monetary Fund.

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