Capital Misallocation and Financial Distress: Social Implications for Chinese Firms

Sushan Lan, Laura Aibolovna Kuanova, Bishala Maerdan

Qainar Journal of Social Science, 2026

Full text Open access: Gold Metadata (CSL-JSON)
DOI 10.58732/2958-7212-2026-3-93-110
Data confidence 70 medium
How this score is calculated

It is built from checkable properties of the record itself: whether the article has a DOI, how many independent sources confirmed its data, whether the required fields are filled in, and how recent the latest confirmation is. Disagreement between sources and a missing identifier lower it. A value of 80 or above means the record was published without further checking; 60 to 79 means it is published at reduced confidence, with a manual check advisable. A record verified by an editor by hand is never pushed below 90 by a recalculation. This scores our data about the article, not the article itself.

Abstract

Inefficient allocation of financial capital can increase the vulnerability of companies, limiting their financial stability and creating social consequences for stakeholders. The aim of this study is to examine how capital misallocation affects corporate financial distress among Chinese listed companies from 2010 to 2023 and to explore the underlying mechanisms of this relationship. The empirical analysis is based on panel data from Chinese companies whose shares are traded on the A-shares market for 2010-2023. The source data is obtained from the CSMAR database. Regression models with individual and temporary fixed effects and robust standard errors were used to evaluate the relationships. The results show that inefficient capital allocation significantly increases the risk of financial insolvency. The stability of the result is confirmed by using the O-score (0.0410), including the regional financial development indicator (-0.1189) and excluding observations for 2019-2020. An analysis of the mechanisms shows that inefficient capital allocation reduces the operating profitability of companies (-0.0094) and at the same time increases the degree of manipulation of financial leverage (0.0423). Inefficient capital allocation increases the risk of financial distress among non-labor-intensive companies (-0.1379) and companies in competitive industries (-0.1196). The results show that improving the efficiency of financial resource allocation and limiting excessive debt burden can help reduce the risk of financial insolvency and strengthen the sustainability of companies.