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How does financial misallocation affect firm markups? Theoretical mechanisms and empirical evidence

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  • Li, Zichen
  • Ma, Xiaoyi

Abstract

Global disparities in financial resource allocation increasingly shape firm competitiveness and market structure. Using microlevel data from Chinese A-share listed firms, this study investigates how financial misallocation affects firm markups and the mechanisms involved. Results show that financial misallocation significantly lowers firm markups, and this relationship remains robust after addressing endogeneity and conducting multiple robustness checks. Further analysis reveals that financial misallocation weakens pricing power mainly by reducing value creation efficiency and restricting innovation boundary expansion. Heterogeneity tests indicate that this negative effect is more pronounced among non–state-owned firms and those lacking industry–finance integration. Quantile regression results also confirm a nonlinear pattern, showing greater adverse effects on high-markup firms. The findings emphasize the need to improve financial system efficiency and optimize capital allocation across sectors and regions to enhance competitiveness and foster sustainable growth in a globalized financial environment.

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  • Li, Zichen & Ma, Xiaoyi, 2026. "How does financial misallocation affect firm markups? Theoretical mechanisms and empirical evidence," Finance Research Letters, Elsevier, vol. 87(C).
    • Handle: RePEc:eee:finlet:v:87:y:2026:i:c:s1544612325022664
    DOI: 10.1016/j.frl.2025.109025
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