Financial constraints and firms' markup: evidence from China

Using the micro data of Chinese manufacturing firms, this study analyzes the impact of financial constraints on firms' markup and their influence mechanism. The findings suggest that financial constraints significantly reduce firms' markup. The result is still valid after a series of robustness tests, such as key indicator substitution, analysis of endogeneity problems, controlling for other policy changes, dynamic panel model estimation, and quantile regression. An analysis of the influence mechanism shows that, on the one hand, financial constraints inhibit the improvement of firms' production efficiency and reduce its markup through the productivity channel; on the other hand, financial constraints also reduce firms' market pricing power and exert a significant negative impact on firms' markup through the market pricing channel. At the same time, significant heterogeneity exists in the negative impact of financial constraints among different firm types. This paper not only enriches our understanding of the relationship between financial constraints and firms' markup, but also provides a new perspective for a more comprehensive grasp of the micro economic effects of financial constraints.