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Stock Market Liberalization and Capital Misallocation

Author

Listed:
  • Xiaoxue Zhao

    (Department of Economics, Wesleyan University)

  • Abigail S. Hornstein

    (Department of Economics, Wesleyan University)

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.

Suggested Citation

  • Xiaoxue Zhao & Abigail S. Hornstein, 2025. "Stock Market Liberalization and Capital Misallocation," Wesleyan Economics Working Papers 2025-007, Wesleyan University, Department of Economics.
    • Handle: RePEc:wes:weswpa:2025-007
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    File URL: http://repec.wesleyan.edu/pdf/ahornstein/2025007_hornstein.pdf
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    More about this item

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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