The impacts of financial development and marketization process on firm´s external financing constraints: Evidence from China

The relationship between financial development and economic growth has long been a topic of intense interest and debate in economic literature. Prior related research documented that financial development accelerate the economic growth. This paper empirically examines the impacts of financial development and marketization process on firm´s external financial constraints by investigating whether financial development and marketization process reduce the sensitivity of investment to cash flows using firm-level data. Empirical results indicate that financial development and marketization process significantly reduce the investment-cash flows sensitivity of financially constrained firms. However, the investment-cash flow sensitivity of financially unconstrained firms is increasing with financial development and marketization process. Thus, this paper provides evidence that financial development and marketization process help financially constrained firms relax external financing constraints, and further accelerate the firm´s capital investment and economic growth as a whole.