The Misallocation of Finance

84 Pages Posted: 8 Dec 2015 Last revised: 11 Mar 2021

See all articles by Toni M. Whited

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Jake Zhao

Peking University - HSBC School of Business

Date Written: June 30, 2016

Abstract

We estimate real losses arising from the cross-sectional misallocation of financial liabilities. Extending the framework of Hsieh and Klenow (2009) to the liabilities side of the balance sheet and using manufacturing firm data from the United States and China, we find significant misallocation of debt and equity in China but not the United States. Reallocating liabilities to firms in China to mimic U.S. efficiency would produce gains of 51%--69% in terms of real value-added, with only 17%--21% stemming from inefficient debt-equity combinations. For Chinese firms that are large or in developed cities, we estimate lower distortionary costs of equity and debt.

Keywords: external finance, misallocation, financing costs

JEL Classification: G32, G35

Suggested Citation

Whited, Toni M. and Zhao, Jake, The Misallocation of Finance (June 30, 2016). Ross School of Business Paper No. 1295, Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2699817 or http://dx.doi.org/10.2139/ssrn.2699817

Toni M. Whited (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jake Zhao

Peking University - HSBC School of Business ( email )

University Town
Shenzhen, 518055
China

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