The Empirical Research And Mechanism Analysis Of Financial Structure Affecting The Efficiency Of Capital Allocation

The discussion of financial structure has always been a controversial topic. Our banking sector has made an indelible contribution to China’s rapid economic development. However, there exist many urgent problems in banking sector which menacing the comprehensive development of the real economy. Based on our economic intuition, the increase of the proportion of direct financing should accelerate the efficiency of capital allocation. But given that China’s direct financing market is not perfect yet, this improvement needs to be validated, which is the focus of this paper.This paper summarizes three financial functions of the banking and capital market and gives examples of problems which exist in banking and capital market’s functions. I find that the existence of these problems will make it difficult for banking and capital markets to allocate capital effectively.In the empirical part, this paper utilizes Jeffery Wurgler’s model to estimate the national efficiency of capital allocation, both between-year and between-region. I find that the efficiency of capital allocation shows a slow downward trend. In the further discussion of the relationship between financial structure and the efficiency of capital allocation, I find the increase of proportion of direct financing can’t improve the efficiency of capital allocation. Also the development of credit financing can’t explain the decline of efficiency. Even the direct financing shows a negative impact on efficiency of capital allocation significantly. The expansion of small and medium banks plays a significant role in capital optimization. At the end of this paper, I propound some policy recommendations based on these conclusions above.