1 s2.0 S0890838924001094 Main

Journal Pre-proof
Human capital in the financial sector and corporate innovation: Evidence from China
Guanchun Liu, Feng He, Chengsi Zhang, Saeed Akbar, Youwei Li
PII: S0890-8389(24)00109-4
DOI: https://doi.org/10.1016/j.bar.2024.101370
Reference: YBARE 101370
To appear in: The British Accounting Review
Received Date: 17 January 2023

Revised Date: 31 December 2023
Accepted Date: 12 March 2024
Please cite this article as: Liu, G., He, F., Zhang, C., Akbar, S., Li, Y., Human capital in the financial
sector and corporate innovation: Evidence from China, The British Accounting Review (2024), doi:
https://doi.org/10.1016/j.bar.2024.101370.
This is a PDF file of an article that has undergone enhancements after acceptance, such as the addition
of a cover page and metadata, and formatting for readability, but it is not yet the definitive version of
record. This version will undergo additional copyediting, typesetting and review before it is published
in its final form, but we are providing this version to give early visibility of the article. Please note that,
during the production process, errors may be discovered which could affect the content, and all legal
disclaimers that apply to the journal pertain.
© 2024 Published by Elsevier Ltd.

Human Capital in the Financial Sector and Corporate
Innovation: Evidence from China
Guanchun Liu
Lingnan College
Sun Yat-sen University, Guangzhou, P. R. China
Email: liuguanchun1@126.com
f
oo
Feng He
School of Finance,
r
-p
Capital University of Economics and Business, Beijing, P.R. China
Email: feng_ac@163.com
re
lP
Chengsi Zhang
School of Finance & China Financial Policy Research Center
na
Renmin University of China, Beijing, P.R., China

Email: zhangcs@ruc.edu.cn
ur
Jo
Saeed Akbar
School of Management,
University of Bradford, Bradford, BD7 1DP, UK
Email: s.akbar10@bradford.ac.uk
Youwei Li
Business School,
University of Hull, Hull, HU6 7RX, UK
Email: Youwei.Li@hull.ac.uk
Human Capital in the Financial Sector and Corporate
Innovation: Evidence from China
Abstract
This paper investigates how human capital in the financial sector affects corporate innovation.
Based on China’s National Economic Census in 2008, we construct a measure of the financial
sector’s human capital across prefecture-level cities and then match the data with nonfinancial
listed firms over 2009–2017. We find that human capital in the financial sector plays a
f
oo
significant and positive role in firms’ patent quantity and quality; this effect is more pronounced
for firms with higher R&D intensity, more serious financial constraints, lower industry
r
-p
competition and those located in regions with lower bank density and lower marketization
levels. Furthermore, the mechanism tests show that debt issuance and R&D investment increase
re
as more highly educated workers flow into the financial sector, while the cost of debt and the
lP
cash flow sensitivity of fixed assets investment decrease, consistent with the credit constraints
na
channel. Our findings argue that increasing human capital in the financial sector does not
impede corporate innovation but strengthens corporate innovation by reducing the information
ur
asymmetry between the financial and productive sectors.

Jo
Keywords: Financial sector human capital; Corporate innovation; Credit constraints; China
JEL classification: D22, G20, O31
1. Introduction
Over the past four decades, the size and skill intensity of the financial sector have grown
considerably in many developed and emerging countries (e.g., Philippon and Reshef, 2013;
Gennaioli et al., 2014; Philippon, 2015; D'Acunto and Frésard, 2018). For example, the value
added of finance as a share of GDP in the U.S. increased consistently from 2% in the 1940s to
8% during the 2008 financial crisis (Gennaioli et al., 2014), and the difference in the share of
skilled workers between the financial and private sectors rose from 0.12 to 0.2 (Philippon and
Reshef, 2012). However, although a small but growing number of studies explain the growth
f
oo
of the financial sector from the viewpoint of social wealth (Gennaioli et al., 2014) and shadow
banking (Greenwood and Scharfstein, 2013), much less is known about its economic
r
-p
consequences. To fill this gap, we examine how human capital in the financial sector affects
corporate innovation in China.
re
From a theoretical perspective, the effect of the financial sector’s human capital on
lP
corporate innovation is ambiguous. On the one hand, given that the stock of human capital for
a given society is fixed, increasing human capital in the finance sector could lead to lower
na
corporate innovation through two channels. First, more talented workers in the financial sector
ur
crowd out the number of inventors in the productive sector, resulting in less R&D activities and
Jo
innovation output (e.g., Philippon, 2010; Cahuc and Challe, 2012). Second, as an important
kind of rent-seeking activity that generally exhibits natural increasing returns, the growth of the
financial sector due to human capital accumulation would create a negative externality on the
productive sector (e.g., Murphy, et al., 1993; Acemoglu, 1995), which then makes innovation
activities less profitable and the incentive for corporate innovation decrease. In this paper, the
negative effects on inventors and innovation incentives are called the talent crowding-out
hypothesis.
On the other hand, firms are generally faced with financial constraints due to credit market
imperfections (e.g., Hubbard, 1998; Bayer, 2006), especially high-technology firms, since
innovation activities are characterized by highly uncertain returns and low collateral value (e.g.,
Carpenter and Petersen, 2002; Brown et al., 2009). Many studies find that local bank
development promotes the access of firms to external financing, resulting in increased corporate
1
leverage and R&D investment (e.g., Paravisini, 2008; Chava et al., 2013; Cornaggia et al., 2015;
Braggion and Ongena, 2017). In particular, in an asymmetric information environment, the
financial sector needs to pay screening and monitoring costs to prevent firms’ moral hazard
(e.g., Boyd and Prescott, 1986; Greenwood and Jovanovic, 1990; Greenwood et al., 2010). If
increasing human capital helps reduce information asymmetry by improving the efficiency of
screening and monitoring, this would facilitate the supply of financial services, which would
then spur firms to carry out innovation activities. In this paper, the channel of information
asymmetry is called the credit constraints hypothesis.
In this paper, given that financial repression is an intrinsic characteristic of China’s
f
oo
financial system (e.g., Allen et al., 2005; Lu and Yao, 2009; Poncet et al., 2010; Song et al.,
2011), we emphasize that the information asymmetry channel dominates the effects of the
r
-p
financial sector’s human capital on corporate innovation. To test the credit constraints
hypothesis, we employ the 2008 China National Economic Census (CNEC) database to
re
construct a measure of the financial sector’s human capital across prefecture-level cities, which
lP
is defined as the relative education attainment of the financial sector over that of the other
sectors. Then, we match the proxy with the data of nonfinancial listed firms for 2009–2017 to
na
conduct an empirical analysis.

ur
To preview our results, we find that increasing human capital in the financial sector plays
Jo
a significant and positive role in corporate innovation. On average, a one-standard deviation in

the financial sector’s human capital at the city level leads to an increase in the number of total
patent applications and grants of 5.7% and 5.0%, respectively. In particular, the positive effect
is mainly reflected in invention patents, while it does not exist in noninvention (utility model
and design) patents. Since the technological novelty of invention patents is greater than that of
noninvention patents, we conclude that the quality of corporate innovation increases as more
highly educated workers flow into the financial sector. To verify the robustness of our baseline
findings, we conduct a battery of sensitivity tests, including an instrument variable approach,
sample selection and standard error adjustment.
Furthermore, we test the credit constraints channel by examining how a city’s credit supply
and a firm’s financing decisions respond to increasing human capital in the financial sector. The
mechanism tests show that as a city’s credit supply increases, its debt issuance and R&D
2
expenditures increase, and the cost of debt and the cash flow sensitivity of fixed assets
investment decrease. In other words, these findings indicate that a firm’s financial constraint
status is negatively related to the financial sector’s human capital, consistent with the credit
constraint channel. Additionally, we conduct several cross-sectional tests to further shed light
on the mechanism involved. The results illustrate that the positive effects of the financial
sector’s human capital on the quantity and quality of corporate innovation are more pronounced
for firms with higher R&D intensity, more serious financial constraints, lower industry
competition and lower bank density and lower marketization.
This paper contributes to the literature in the following three ways. First, this paper
f
oo
complements the growing literature that focuses on the growth effect of the financial sector’s
human capital. While several studies provide descriptive statistics for relative skill intensity or
r
-p
education in the financial sector (Goldlin and Katz, 2008; Philippon and Reshef, 2012, 2013),
some studies explore the role of human capital allocation between the financial and productive
re
sectors in economic growth and efficiency based on theoretical frameworks (Philippon, 2010;
lP
Cahuc and Challe, 2012). To the best of our knowledge, this is the first study to empirically
investigate how human capital in the financial sector affects corporate innovation. In this paper,
na
we find that increasing the financial sector’s human capital plays a significantly positive role
ur
in the quantity and quality of corporate innovation by alleviating its financial constraints.
Jo
Second, this paper is relevant to the literature on the nexus between financial development
and corporate innovation. Most of those previous studies generally use market size indicators
(e.g., bank density and credit supply) to measure financial development and prove the positive
impact of innovation on the banking sector (e.g., Benfratello et al., 2008; Amore et al., 2013;
Chava et al., 2013; Cornaggia et al., 2015; Gu et al., 2020) and stock markets (e.g., Brown et
al., 2013; Hsu et al., 2014; Moshirian et al., 2021). In contrast to these works, however, this
paper introduces a novel dimension of financial development from the perspective of human
capital and provides strong evidence for the key role it plays. In this paper, we argue that
increasing human capital in the financial sector reduces firms’ financial constraints by
mitigating the information asymmetry between creditors and firms.
Third, this paper relates to the literature on the importance of human capital (talent)
allocation to economic growth. A growing branch of the literature investigates the economic
3
effects of human capital allocation between rent-seeking and productive activities (e.g., Baumol,
1990; Murphy et al., 1991; Acemoglu, 1995; Hsieh et al., 2019; Avetisyan et al., 2020). For
example, Murphy et al. (1991) and Ebeke et al. (2015) employ the ratio of college enrollments
in law to measure talent allocation. However, little attention has been given to the allocation of
talent between the finance and nonfinance sectors and its role in aggregate economic outcomes.
In this paper, we fill this gap by exploring the impact of human capital in the financial sector
on corporate innovation in China.
Our paper is different from existing research focusing on managers’ characteristics of
corporate innovation (Hirshleifer et al., 2012; Gurd and Helliar, 2017; Islam and Zein, 2020);
f
oo
we focus on human capital from the credit supply side. In addition to the firm-level
characteristic from the capital demand side, we show that the external factor of human capital
r
-p
in the financial sector is vital for corporate innovation performance. Our paper also highlights
re
a new aspect of market-level influencing factors on innovation. In contrast to product market
competition (Grieser and Liu, 2019), bank competition (Chava et al., 2013; Cornaggia et al.,
lP
2015), peer firms’ influence (Machokoto et al., 2021), audit quality (Nguyen et al., 2020), and
na
financial market development (Hsu et al., 2014; Bae et al., 2021), the human capital of the
financial sector provides a microfoundation basis for financial market development and affects
ur
corporate innovation by reducing the information asymmetry between the financial and
Jo
productive sectors.
The remainder of this paper is organized as follows. Section 2 proposes our key hypothesis.
Section 3 presents the identification strategy, including econometric specifications, data and
variable definitions, and stylized facts. Section 4 provides the empirical results, including the
baseline estimate, a variety of robustness checks and mechanism tests. Section 5 discusses the
cross-sectional heterogeneity of our baseline findings. Section 6 concludes.
2. Hypothesis development
Technological innovation from research and development (R&D) activities is a key driver
of economic growth. However, since R&D investment faces significant adverse selection and
4
moral hazard problems, it is characterized by severe information asymmetry, lack of collateral
value and highly uncertain returns (e.g., Carpenter and Petersen, 2002; Brown et al., 2009;
Brown et al., 2012), suggesting that it is difficult for creditors to accurately evaluate the quality
of R&D projects. Furthermore, given that R&D activities are subject to large adjustment costs
because most R&D expenditures involve wage payments to inventors and training costs, it is
highly important for firms to maintain a relatively smooth path of R&D investment (Brown et
al., 2011). Therefore, corporate innovation is susceptible to financial constraints.
In theory, by producing and processing information, mobilizing savings and identifying
investment opportunities (Levine, 2002), a well-developed financial system helps alleviate a
f
oo
firm’s financial constraints that restrict its R&D investment. First, given that R&D activities
involve a great deal of professional knowledge, the financial sector generally prevents moral
r
-p
hazard problems at the cost of screening and monitoring (e.g., Boyd and Prescott, 1986;
Greenwood and Jovanovic, 1990; Greenwood et al., 2010). For example, banks usually select
re
high-quality firms by means of collateral requirements and controlling the size of loans (Bester,
lP
1985). Second, due to severe information asymmetry and long investment periods, contracts in
R&D activities are incomplete. To address this problem, financial institutions generally adopt
na
prenegotiation and duration limitations (De la Fuente and Marin, 1996). Overall, the financial
ur
sector reduces information asymmetry via a series of activities, such as information collection
Jo
and processing, eventually leading to the accomplishment of credit contracts.

In recent decades, while the share of jobs held by skilled workers has increased across
countries, the financial sector has become relatively more skill intensive than the overall supply
of skilled labor (Philippon and Reshef, 2013; D'Acunto and Frésard, 2018). That is, one
emerging feature of the financial sector is knowledge intensity, suggesting that it is remarkable
for the financial sector to integrate human capital and credit capital in the modern world. Like
in the literature focusing on the important role of human capital in firms’ productivity (e.g.,
Fafchamps and Quisumbing, 1999; Che and Zhang, 2018), we emphasize that there is a positive
effect of human capital in the financial sector on credit supply by improving the efficiency of
information collection and production. Specifically, with respect to the financial sector, human
capital helps improve the efficiency of screening and monitoring by means of learning by doing
so and knowledge spillover (Bontis and Serenko, 2009; Caprio et al., 2007; Casu and Girardone,
5
2009), which reduces the information asymmetry between creditors and firms, improving the
willingness of the financial sector to provide credit for R&D activities. In addition, as Gennaioli
et al. (2014) noted, more highly educated workers are conducive to reducing the information
asymmetry between the financial sector and households, which mobilizes social savings that
serve as the main driver of credit supply.
In this paper, we argue that increasing human capital in the financial sector not only
increases the scale of credit supply but also lowers the costs of screening and monitoring. Then,
the degree of financial constraints faced by R&D activities decreases, resulting in an increase
in the amount of innovation output. In particular, compared with low-quality innovation, high-
f
oo
quality innovation involves greater technological advancements (He and Tian, 2013; Tian and
Wang, 2014), indicating that high-quality innovation is characterized by greater uncertainty,
r
-p
longer periods and larger scales of funds. In other words, the information asymmetry between
creditors and high-quality innovation projects is more severe, leading to higher screening and
re
monitoring costs. Therefore, if human capital in the financial sector effectively reduces
lP
information asymmetry, high-quality innovation will benefit more.

Furthermore, given the finite stock of human capital for an economy, increasing human
na
capital in the finance sector hinders the innovation capacity of productive firms by crowding
ur
out inventors and lowering the profitability of R&D activities (e.g., Acemoglu, 1995; Murphy
Jo
et al., 1991; Philippon, 2010; Cahuc and Challe, 2012). However, since the nationwide higher
education expansion in the late 1990s, the constraint of skilled labor in human capital-intensive
industries has been relaxed in China (Che and Zhang, 2018), revealing that the talent crowding-
out channel may be negligible. In particular, China’s financial system is bank-based (Lin et al.,
2015), and financial repression is an intrinsic characteristic of the banking sector (e.g., Allen et
al., 2005; Lu and Yao, 2009; Poncet et al., 2010; Song et al., 2011). Specifically, most Chinese
banks are controlled by governments at different levels; thus, they prefer providing banking
credit to state-owned enterprises (SOEs), which reduces the access of private firms to credit.
In the previous vein, we predict that the credit constraints channel induced by human
capital in the financial sector plays a leading role in corporate innovation. In detail, more highly
educated workers in the financial sector help reduce information asymmetry in firms’ R&D
activities, which spurs the quantity and quality of corporate innovation via the credit constraints
6
channel. Thus, our main hypothesis is as follows:
Hypothesis: Increasing human capital in the financial sector promotes the quantity and
quality of corporate innovation by reducing firms’ financial constraints.
3. Identification strategy
3.1. Econometric specification
To examine the effect of the financial sector’s human capital on corporate innovation, we
set the following econometric specification:
f
oo
𝐼𝑛𝑛𝑖𝑗𝑐𝑝𝑡+1 = 𝜃𝐹𝑒𝑑𝑢𝑐 + 𝜷𝑿𝒄𝒕 + 𝜸𝒁𝒊𝒕 + 𝜇𝑝 + 𝜔𝑗 + 𝜖𝑖𝑗𝑐𝑝𝑡 , (1)
where 𝑖, 𝑗, 𝑐, 𝑝, and 𝑡 denote the firm, industry, city, province and year, respectively; 𝐼𝑛𝑛 is
r
-p
the dependent variable depicting a firm’s innovation capacity; and 𝐹𝑒𝑑𝑢 is the core
explanatory variable of interest describing the financial sector’s human capital across
re
prefecture-level cities. Moreover, a series of control variables at the city level 𝑿𝒄𝒕 and firm
lP
level 𝒁𝒊𝒕 are introduced into the regression. In addition, province fixed effects 𝜇𝑝 and industry
fixed effects 𝜔𝑗 are included to control for time-invariant province and industry characteristics
na
that potentially affect corporate innovation. The coefficient of interest is 𝜗, which captures how
ur
a firm’s innovation responds to an increase in the financial sector’s human capital. According
Jo
to our main hypothesis, we predict that 𝜗 is significantly positive.
3.2. Data and variable definitions
This paper uses four datasets. First, our firm-level data are retrieved from the China Stock
Market and Accounting Research (CSMAR) database and the Chinese Research Data Services
(CNRDS) database, which consist of all listed companies in the Shanghai and Shenzhen Stock
Exchanges over 2009–2017. Starting from the initial sample, we exclude the financial (i.e.,
banks, securities, insurance and real estate) industries and firm-year observations with missing
values for the regression variables discussed below. Second, the 2008 CNEC database provides
specific information on workers’ educational background for firms in different industries,
allowing us to construct a measure of human capital in the financial sector.1 Third, the City
1 The 2008 CNEC database covers all firms in the secondary and tertiary industries, while the indicators include geographic
7
Statistical Yearbook of China (CCSY) lists detailed information on macroeconomic conditions
at the city level. Appendix Table A1 summarizes the constructions of the key variables used in
our regression analysis.
3.2.1. Measure of the financial sector’s human capital
The measure of the financial sector’s human capital across prefecture-level cities based
on the CNEC database in 2008 proceeds in two steps. First, we calculate the average years of
schooling in the financial sector (i.e., banks, securities, insurance and others) and in the other
sectors excluding finance by aggregating the 2008 CNEC dataset at the prefecture-city and
sector levels. Specifically, a worker’s educational background is classified into five types: (i)
f
oo
junior high school or below, (ii) senior high school, (iii) college, (iv) bachelor’, and (v) master’s
degree or above. By assigning 9, 12, 15, 16, and 19 years to the five educational backgrounds,
r
-p
we define human capital at the city-sector level as the average number of years of schooling
that equals the weighted mean value of workers’ education levels. Second, similar to the
re
definition of Philippon and Reshef (2012), we focus on the education attainment of the labor
lP
force to measure human capital allocation. Specifically, human capital in the financial sector is
measured by the ratio of average years of schooling in the financial sector to that in the other
na
sectors excluding finance.2 Finally, we use the 2008 CNEC database to obtain information on
ur
the financial sector’s human capital across 271 prefecture-level cities.

Jo
3.2.2. Measures of corporate innovation

To gauge a firm’s innovation productivity, following previous studies (e.g., He and Tian,
2013; Acharya et al., 2013; Tian and Wang, 2014; Liu and Qiu, 2016; Fang et al., 2017; Chang
et al., 2019), we construct two different proxies using the CNDRS database as follows.3 The
location, financial conditions, production and operating activities, and employees’ education level, among many others. While
the NEC database is also available for 2004 and 2013, we employ the 2008 CNEC throughout the empirical analysis because
of its superior data availability (i.e., the CNEC datasets in 2004 and 2013 do not contain the financial sector).
2 In this paper, we assume that financial sector’s human capital across prefecture-level cities does not change over 2009–2017.
While it is certainly a strong assumption, we believe that it is made less critical by that fact that we focus on the relative human
capital of employees in the finance sector versus the other sectors excluding finance. By construction, our measure is not
affected by any general drift in educational attainment in all occupations over time.
3 Generally, a firm’s innovation capacity can be measured by using either innovation input (e.g., R&D expenditure) or
innovation output (e.g., patent filing). As Liu and Qiu (2016) point out, while the number of patent captures the effectiveness
of innovation effort (including both observable and unobservable inputs), R&D expenditure is only one particular observable
8
first measure is a firm’s total number of patent applications, which is measured by the natural
logarithm of one plus the number of patent applications filed each year. Furthermore, given that
not all patents can be eventually granted, the second measure is a firm’s total number of patents
granted, which is measured by the natural logarithm of one plus the number of patent
applications filed and eventually granted in a given year.4 Although these two measures are
straightforward and intuitive, they are unable to distinguish groundbreaking innovations from
incremental technological discoveries. That is, they only reflect the quantity of a firm’s
innovations, ignoring the quality of its innovations.
In China, the examination and approval mechanism of noninvention (i.e., utility model and
f
oo
design) patents is less strict than that of invention patents (Prud'Homme, 2017; Tong et al.,
2018), indicating that the technological novelty of invention patents is greater than that of
r
-p
noninvention patents. Therefore, the number of different types of patents can be used to measure
the quality of a firm’s innovation activities, and then we can derive the impact of the financial
re
sector’s human capital on a firm’s innovation quality by comparing the heterogeneous
lP
responses of invention patents and noninvention patents. 5 Specifically, invention patent

application (grant) is measured by the natural logarithm of one plus the number of invention
na
patent applications filed (and eventually granted), and noninvention patent application (grant)
ur
is measured by the natural logarithm of one plus the number of noninvention patent applications
Jo
filed (and eventually granted).

3.2.3. Control variables
Alongside the core explanatory variable, we include relevant control variables at the firm
and city levels. On the one hand, following previous studies (e.g., Acharya, et al., 2014; Fang
et al., 2017), the definitions of the four city-level control variables are as follows: (i) Real GDP
input for innovation, leading to that most scholars generally adopt the number of patent to measure corporate innovation.
4 Given the examination period of patent lasts from three months to thirty-six months in China, there is a lag (about two years
on average) between a patent’s application year and its grant year (He and Tian, 2013). To avoid the truncation bias in patent
counts, we choose the year 2017 as the ending year to precisely measure a firm’s innovation capacity with the number of patent
filed and eventually granted.
5 When measuring a firm’s innovation quality, previous studies also use the number of nonself citations per patent (e.g., He
and Tian, 2013; Chang et al., 2019). However, the truncation problem arises as a patent tends to receive citations over a long
period of time and is more likely to be cited in the early years. Of course, the truncation bias can be corrected by estimating the
shape of the citation-lag distribution, but the CNDRS database does not contain sufficient patent information.
9
per capita, measured by the natural logarithm of real GDP in 2000 constant price divided by
total population; (ii) Government expenditure, measured by the ratio of total fiscal expenditures
to GDP; (iii) Urbanization rate, measured by the ratio of the nonagricultural population to the
total population; and (iv) Industrial structure, measured by the ratio of secondary industry
output to the share of GDP.
On the other hand, based on the literature (e.g., He and Tian, 2013; Tian and Wang, 2014;
Chang et al., 2019), the definitions of six firm-level control variables are as follows: (i) Firm
size, measured by the natural logarithm of total assets; (ii) Firm age, measured by the number
of years after the firm’s establishment; (iii) Return on assets, measured by the ratio of total
f
oo
profits to total assets; (iv) Sale growth, measured by the growth rate of sales revenue; (v) Tobin’s
Q, measured by the ratio of equity market value plus liabilities book value over book value of
r
-p
total assets; and (vi) Stock volatility, measured by the standard deviation of daily stock returns.
In addition, when testing the credit constraints channel, we follow the literature to describe
re
a city’s credit supply and a firm’s financing decisions (e.g., Fazzari et al., 1988; Almeida et al.,
lP
2004; Dong et al., 2012; Wang et al., 2020). The relevant variables are defined as follows: (i)
New loans, measured by the ratio of city-level loans provided by financial institutions to GDP;
na
(ii) Debt issuance, measured by the ratio of net change in total liabilities as a share of total
ur
assets; (iii) Cost of debt, measured by the ratio of interest expenses to total liabilities; (iv) Fixed
Jo
assets investment, measured by the ratio of fixed, intangible and other long-term assets
expenditures to total assets; (v) Cash flow, measured by the ratio of earnings before interest,
depreciation and taxes to total assets; and (vi) R&D investment, measured by the ratio of R&D
expenditures as a share of total assets.
3.3. Stylized facts
To mitigate the estimation bias caused by outliers, we winsorize all continuous variables
at the 1st and 99th percentiles. Our final sample consists of 5,793 firm-year observations. Table
1 provides the descriptive statistics of the underlying variables in our empirical analysis. The
mean value of the financial sector’s human capital is 1.166, and the standard deviation is 0.066,
which illustrates that human capital in the financial sector is higher than that in the productive
sector and that there is a remarkable variation in the financial sector’s human capital across
10
prefecture-level cities. Moreover, the variations in different types of patents across firms are
wide, as suggested by standard deviations greater than one. Furthermore, by aggregating the
data of nonfinancial listed firms at the city level, Fig. 1 reports the correlation between the
financial sector’s human capital and corporate innovation. We find that a firm’s total number
of patent applications and grants increase with human capital in the financial sector, which
provides some preliminary evidence for our main hypothesis.
[Insert Table 1 and Figure 1 about here]
f
4. Empirical results
oo
4.1. Baseline results
r
-p
Table 2 presents our baseline estimates when we use the number of total patent applications
re
and grants as the dependent variable. Columns 1 and 4 control for city characteristics; columns
2 and 5 control for firm characteristics; and columns 3 and 6 control for city and firm
lP
characteristics at the same time. We observe that the core explanatory variable in all regressions
na
is consistently positive and statistically significant. These results demonstrate that increasing
human capital in the financial sector spurs firms to produce more patents, in support of our main
ur
hypothesis. To illustrate the economic magnitude of our estimates, we take the estimation results
Jo
including all the control variables in columns 3 and 6 as an example. The coefficients of the
financial sector’s human capital are 0.864 and 0.752, given that the standard deviation of the
financial sector’s human capital is 0.066 (see Table 1), indicating that a one-standard deviation
in the financial sector’s human capital leads to an increase in the number of a firm’s total patent
applications and grants of 5.7% (0.864×0.066) and 5.0% (0.752×0.066), respectively.
[Insert Table 2 about here]
In addition to the quantity effect shown in Table 2, we also focus on the quality effect of
the financial sector’s human capital on corporate innovation. Table 3 reports our baseline
estimates with the number of different types of patents as the dependent variable. We find that
the coefficient of the financial sector’s human capital is significantly positive in the regressions
for invention patents, while it is insignificant in the regressions for noninvention patents. Given
11
that the technological novelty of invention patents is greater than that of noninvention patents,
these results imply that the financial sector’s human capital plays an active role in firms’
innovation quality, consistent with our main hypothesis. Specifically, the coefficients of the core
explanatory variable are 0.942 and 0.674 in columns 1 and 3, respectively, which document that
a one-standard deviation in the financial sector’s human capital brings about an increase in the
number of invention patent applications and grants of 6.2% (0.864×0.066) and 4.4%
(0.674×0.066), respectively.
f
4.2. Robustness checks
oo
To further ensure the validity of our baseline findings, we conduct a battery of additional
r
robustness checks.
4.2.1. An instrument variable approach
-p
re
Like in other empirical studies, our baseline findings are vulnerable to endogeneity
lP
concerns, which can arise from reverse causality and omitted variables. For example, cities with
greater innovation productivity are likely to attract more talented workers, which may lead to
na
an increase in the human capital of the financial sector. Additionally, we add several city
ur
characteristics to the regressions; however, we are unlikely to control for unobservable city-
level factors that simultaneously determine corporate innovation and human capital in the
Jo
financial sector.
To overcome potential endogeneity, considering that some prefecture-level cities were
selected to implement a development strategy for heavy industry in the early years of New
China, we define a dummy variable (historical heavy industrial base) that depicts whether a
prefecture-level city is one of historical heavy industrial bases as the instrumental variable. First,
based on the interest group theory of financial development proposed by Rajan and Zingales
(2003), the SOE sector in China tends to utilize political networks to restrain the development
of the financial system to avoid competing with the private sector (Liu et al., 2020), which
would make the financial sector less attractive to highly educated workers. Because the central
government established a large number of SOEs in historically heavy industrial areas, the
instrumental variable should be negatively related to the financial sector’s human capital.
12
Furthermore, the instrumental variable is unlikely to affect corporate innovation in modern
China, suggesting that it should satisfy the necessary exclusion restriction.
Furthermore, we also select the natural logarithm of the number of city-level money houses
in the late Qing dynasty (number of money houses) as an alternative instrumental variable for
the following reasons.6 First, because the instrumental variable is a historical characteristic for
each city, it does not matter for corporate innovation in the current period. Second, a well-
developed banking sector is attractive to highly educated talent by offering a high salary, so the
instrumental variable is correlated with the financial sector’s human capital. That is, the number
f
oo
of city-level money houses in the late Qing dynasty should satisfy the assumptions of exclusion
and relevance for the instrument variable estimate.
r
-p
Table 4 reports the results of our instrument variable regressions. Column 1 displays the
re
first-stage regression, where the coefficient of Historical heavy industrial base (Number of
money houses) is significantly negative (positive). Consistent with our expectation, these
lP
findings indicate that the instrumental variable is strongly correlated with the financial sector’s
na
human capital. Columns 2–7 summarize the results of the second-stage regressions. To illustrate
the effectiveness of the instrument variable, we conduct a weak identification test based on the
ur
Cragg–Donald Wald F-statistic. The results show that the weak instrument hypothesis is
Jo
rejected, so our instrument variable is valid. Furthermore, the coefficient of the financial
sector’s human capital is significant and positive in the regressions of total patents and invention
patents (including applications and grants), while it is insignificant in the regressions of
noninvention patents (including applications and grants). These findings again provide robust
evidence that increasing human capital in the financial sector boosts the quantity and quality of
corporate innovation.
4.2.2. A time-variant measure of the financial sector’s human capital
Since the data on the financial sector’s human capital were available only for 2008, our
estimation results exploit the variation across cities. However, one may argue that city fixed
6 The data on money houses are derived from Nongshangbu’s (1914) Zhonghua mingguo yuannian diyici nongshang tongji
biao (First statistics on agriculture and commerce).
13
effects rather than the financial sector’s human capital drive our findings, suggesting that
dealing with the variation in the financial sector’s human capital over time is highly important.
To address this issue, we construct a time-variant measure at the city level as follows. Given
that the CSMAR dataset has provided detailed information on workers’ educational background
for each listed firm since 2009, we first define a time series indicator of the financial sector’s
human capital at the national level from 2009 to 2017. Second, we normalize the value in 2009
to 1 and then multiply city-level financial sector human capital by the time-series indicator.
This newly constructed measure of the financial sector’s human capital varies across cities and
over time.7 If so, we can include firm and year fixed effects in our econometric specification
f
oo
(1). Table 5 shows that the financial sector’s human capital still has a significant impact on the
number and quality of patents held by firms, in accordance with our baseline results.
r
-p
re
4.2.3. Other additional tests
Table 6 summarizes the results of several additional robustness tests. First, in response to
lP
the global financial crisis triggered by the U.S., China implemented an economic stimulus
na
package of four trillion RMB that lasted from December 2008 to the end of 2010, mainly in
terms of bank loans and government subsidies. As shown in the report of China’s National
ur
Development and Reform Commission (CNDRC), 0.37 trillion RMB was allocated to
Jo
innovation and structural transformation activities. Moreover, since 2012, China has entered
the “new normal” stage with a relatively low growth rate, suggesting that there was a marked
difference in the macroeconomic environment before and after 2012. To address these two
concerns, we repeat the baseline results using the subsample covering 2013–2017. Panel A of
Table 6 reports the results.
Second, our empirical analysis assumes that the financial sector across prefecture-level
cities is locally segmented (i.e., capital mobility among cities is low). Boyreau-Debray and Wei
7 It should be noted that the newly constructed measure of financial sector’s human capital may contain measurement errors
for the following reasons: (i) the sample of listed companies is underrepresented; (ii) changes in financial sector’s human capital
across cities are out of step with the whole country.
14
(2005) showed that capital mobility in China is generally low even without formal legal
prohibition, providing some evidence for the key assumption. However, since Chinese cities
have different administrative ranks, several cities can mobilize capital beyond their jurisdictions.
To further address this concern, we exclude special cities from the full sample, including
centrally administered municipalities, provincial capitals and cities specifically designated in
the state plan. Panel B of Table 6 provides the results.
Third, given that human capital in the financial sector across prefecture-level cities is
measured using information from the 2008 CNEC database, our estimates mainly utilize the
cross-sectional variation in the core explanatory variable, indicating that we should obtain
f
oo
similar findings based on cross-sectional data. Panel C of Table 6 displays the results using the
sample mean for 2009–2017.
r
-p
Fourth, to investigate the effect of the financial sector’s human capital on corporate
innovation, we use the data from populations with grouped structures by merging aggregate
re
data with micro-observations. As Moulton (1990) argues, however, the assumption of
lP
independent disturbances is typically not appropriate; therefore, ordinary least squares can lead
to standard errors that are seriously biased downwards. Considering that the key explanatory
na
variable is at the city level and that there may be some correlation within the same year, we
ur
allow for standard errors clustered at the city and year levels, and the results are reported in
Jo
Panel D of Table 6.
Fifth, one may argue that our baseline results are mainly driven by the situation of the local
labor market rather than by human capital in the financial sector. To address this concern, we
include two additional control variables at the city and firm levels. Specifically, we use the
natural logarithm of college students (unit: 10^6) to measure the city-level labor market and the
ratio of employees with a bachelor’s degree or above to reflect firm-level human capital. Panel
E of Table 6 presents the results.
As shown in Table 6, the financial sector’s human capital plays a significant and positive
role in total patents and invention patents (including applications and grants), while it has no
significant effect on noninvention patents (including applications and grants). Therefore, after
we adjust our sample, standard errors and baseline specification, these results show that a firm’s
patent quantity and quality increase as more talented workers flow into the financial sector, in
15
support of our main hypothesis.
4.3. Mechanism tests
Thus far, our baseline results are consistent with the argument that the financial sector’s
human capital enhances corporate innovation through the credit constraints channel. Since
many previous works have confirmed the active role of external finance in corporate innovation
(e.g., Chava et al., 2013; Cornaggia et al., 2015; Braggion and Ongena, 2017) 8 , in this
subsection, we focus on this mechanism by exploring how a prefecture-level city’s credit supply
and a firm’s financing decisions vary with human capital in the financial sector.
Table 7 reports the results of the mechanism tests. In column 1, we conduct the regression
f
oo
of new loans at the city level on the financial sector’s human capital. We find that the coefficient
of the financial sector’s human capital is positive and statistically significant, suggesting that
r
-p
the amount of a city’s credit supply increases with human capital in the financial sector. In
re
columns 2–3, we examine the effects of the financial sector’s human capital on a firm’s debt
issuance and cost of debt, which are measured by the ratio of net change in total liabilities to
lP
total assets and the ratio of interest expenses to total liabilities, respectively, as in Chaney et al.
na
(2012), Dong et al. (2012) and Wang et al. (2020). The coefficient of the financial sector’s
human capital in the debt issuance regression is significantly positive, while it is significantly
ur
negative in the debt cost regression. These results show that increasing human capital in the
Jo
financial sector helps improve a firm’s access to credit and reduce the associated cost.
Furthermore, based on the framework of Fazzari et al. (1988), we use the cash flow
sensitivity of fixed assets investment to measure a firm’s financial constraints and investigate
the role of the financial sector’s human capital in column 4. We find that the interaction term is
significant and negative, demonstrating that the financial sector’s human capital lowers the
sensitivity of fixed assets investment to cash flow. That is, a firm’s financial constraint
decreases as more talented workers flow into the financial sector. In addition, we assume that
the credit expansion caused by increasing human capital in the financial sector helps alleviate
8 Using our sample, Fig. A1 plots the correlation between debt issuance and the number of total patent applications and total
patent grants, again confirming the active role of external finance in corporate innovation.
16
financing constraints on innovation activities. To verify the validity of this assumption, we
directly investigate how a firm’s R&D investment responds to increasing human capital in the
financial sector. In column 5, the coefficient of the financial sector’s human capital is
statistically positive, meaning that human capital in the financial sector is positively associated
with a firm’s R&D investment. Overall, the above findings in Table 7 provide strong evidence
for the credit constraints channel.
More importantly, the positive nexus between the access of firms to external financing and
the financial sector’s human capital may be a result of both supply and demand factors. For
example, if firms rather than banks dominate credit markets, the main reason for more debt
f
oo
issuance is the increased demand of firms. In this paper, we argue that the credit supply theory
dominates our findings. First, many studies have shown that China is in a state of “financial
r
-p
repression” (e.g., Poncet et al., 2010; Liu et al., 2020; Du et al., 2023), indicating that banks
play a leading role in credit markets. Second, when the demand (supply) factor drives our
re
findings, we should observe an increase (decrease) in the cost of debt. However, as shown in
lP
column 3 of Table 7, the cost of debt declines as the financial sector’s human capital grows.
Third, we detect whether more credit is granted to financially constrained firms. If the amount
na
of credit supply does not change, they should have no significant response to local financial
ur
markets. Specifically, the constrained group consists of non-SOEs or firms whose financial
Jo
constraint status was defined as Kaplan and Zingales’s (1997) proxy in 2007 above the sample
median of the index. From Appendix Table A2, we find that increasing human capital in the
financial sector benefits constrained firms more. In sum, these results support the credit supply
theory.
5. Cross-sectional tests
To provide further evidence for our argument, we use the number of patent applications as
the dependent variable to conduct cross-sectional tests derived from our main hypothesis.9
9 When using the number of patent grant as the dependent variable, we can obtain similar findings. To save space, these results
are not reported, which are available upon request.
17
5.1. The key role of firm characteristics
5.1.1. R&D intensity

According to our main hypothesis, if the financial sector’s human capital indeed helps
firms obtain more money, the positive impact on corporate innovation should be stronger for
R&D-intensive firms. To test this prediction, we split the full sample into two groups based on
a firm’s R&D intensity, which is defined as the number of total patent applications, the ratio of
R&D investment to total assets and whether the firm is a high-tech enterprise. Specifically, a
firm is classified into the high (low) group if its R&D intensity in 2007 is above (below) the
sample median of the index or if it is a high-tech firm; additionally, we separately examine the
f
oo
innovation effect of the financial sector’s human capital for each group. Table 8 provides the
results. We find that the coefficient of the financial sector’s human capital is significant and
r
-p
positive for firms with higher R&D intensity, while it is insignificant and smaller for firms with
re
lower R&D intensity. These findings support the prediction drawn from our main hypothesis
that the financial sector’s human capital benefits R&D-intensive firms more.
lP

na
5.1.2. Financial constraints

ur
We argue that human capital in the financial sector is conducive to easing a firm’s financial
constraints through the information asymmetry channel. If this is true, the innovation effect
Jo
should be more pronounced in firms with greater financial constraints. To test this prediction,
we sort the full sample into two subsamples on the basis of a firm’s ownership and the KZ index
proposed by Kaplan and Zingales (1997). In particular, a firm is sorted into the unconstrained
(constrained) group if its ownership status is SOE (non-SOE) or its KZ value in 2007 is below
(above) the sample median of the index. We separately estimate the importance of the financial
sector’s human capital to corporate innovation for each group, and the results are reported in
Table 9. The coefficient of the financial sector’s human capital is significantly positive for non-
SOEs and firms with KZ indices in 2007 below the sample median, whereas it is nonsignificant
and smaller for SOEs and firms with KZ indices in 2007 above the sample median. These results
show that the quantity and quality of innovation activities in financially constrained firms
increase more, consistent with our argument that a firm would obtain more access to external
18
financing as more talented workers flow into the financial sector.
5.2. The key role of industry competition
We emphasize that the credit constraints channel is attributed to the active impact of human
capital in the financial sector on reducing information asymmetry. Given that industry
competition acts as an external disciplinary mechanism to reduce creditors’ monitoring costs
(e.g., Hart, 1983; Dyck and Zingales, 2004; Giroud and Mueller, 2011), it is natural to predict
that the positive innovation effect of the financial sector’s human capital should be stronger in
f
concentrated industries. To test this prediction, we split the full sample into two groups using
oo
the Herfindahl–Hirschman Index (HHI) of sales to measure industry competition, and a firm is
r
classified into the high (low) group if its HHI value in 2007 is below (above) the sample median
-p
of the index. Table 10 displays the results for each group by separately estimating the
re
heterogeneous effects of the financial sector’s human capital on corporate innovation. The
lP
coefficient of the financial sector’s human capital is significant and positive for concentrated
industries, while it is insignificant for competitive industries. These results show that firms with
na
greater industry competition benefit less from increasing human capital in the financial sector,
ur
in support of the prediction derived from our main hypothesis.

Jo
5.3. The key role of local macroeconomic conditions
5.3.1. Bank density

China’s financial system is bank-based, so the development of the banking sector
determines a firm’s access to bank credit (Lin et al., 2015). If the credit constraints channel is
true, we should observe a stronger impact on corporate innovation in regions with a less
developed banking sector. Following Bernalillo et al. (2008), we measure a city’s bank density
as the number of commercial bank branches divided by the total population, and a city is
classified into the high (low) group if its value in 2007 is above (below) the sample median of
the index. Panel A of Table 11 replicates the innovation effect of the financial sector’s human
capital for each group. We find that the coefficient of the financial sector’s human capital is
19
significantly positive for firms located in regions with lower bank density, while it is
insignificant and negative for firms located in regions with higher bank density. Consistent with
Table 9, these findings again confirm the key role of the financial sector’s human capital in
reducing firms’ financial constraints.
5.3.2. Marketization level

Given that the market environment of a region determines a firm’s information disclosure,
the monitoring costs of financial institutions are greater in regions with a lower marketization
level, indicating that there should be a more pronounced innovation effect on the financial
f
oo
sector’s human capital if it indeed helps creditors monitor firms at a lower cost. To test this
prediction, we use the overall marketization index across provinces developed by Fan et al.
r
-p
(2011) to divide the full sample into two groups, and a province is classified into the high (low)
re
group if its value in 2007 is above (below) the sample median of the index. We separately
estimate the innovation effect of the financial sector’s human capital for each group, and Panel
lP
B of Table 11 presents the results. Although the coefficient of the financial sector’s human
na
capital is significant and positive for different subsamples, it is greater for firms located in
regions with a lower marketization level. These results document that the positive impact of the
ur
financial sector’s human capital on corporate innovation is greater in a highly information

Jo
asymmetric environment, in accordance with the prediction derived from our main hypothesis.
6. Conclusion
In recent years, the finance industry has attracted an increasing number of highly educated
workers, but little is known about how this phenomenon is related to the real economy. Since
the financial sector provides credit for firms in an information asymmetry environment, we
hypothesize that increasing human capital in the financial sector helps lower the screening and
monitoring costs of creditors, which then alleviates firms’ financial constraints on R&D
activities. To test this hypothesis, this paper investigates the impact of human capital in the
financial sector on corporate innovation. Specifically, we use the 2008 CNEC database to
construct a measure of the financial sector’s human capital across prefecture-level cities and
20
then match it with the data of nonfinancial listed companies from 2009 to 2017.
The results document that increasing the financial sector’s human capital plays an active
role in the quantity and quality of corporate innovation. In particular, the effects are more
pronounced for firms with higher R&D intensity, greater financial constraints, lower industry
competition and lower bank density and lower marketization levels. Furthermore, we find that
the cost of debt and the cash flow sensitivity of fixed assets investment decrease as more highly
educated workers flow into the financial sector, while debt issuance and R&D investment
increase in support of the credit constraints channel. In addition, our main findings are robust
to a variety of robustness checks.
f
oo
Overall, our findings show that increasing talented workers in the financial sector does not
hinder corporate innovation capacity by crowding out human capital allocated to the real sector
r
-p
but stimulates the quantity and quality of corporate innovation through the credit constraints
channel, indicating that it is essential for China to worry about human capital gathering in the
re
financial sector at the current stage. Our paper has several important policy implications. On
lP
the one hand, given that China is still experiencing financial repression, more attention should
be given to cultivating more highly educated workers in the financial sector, which is conducive
na
to meeting the financial services demand of the real sector by reducing information asymmetry.
ur
On the other hand, credit shortages constrain R&D activities; therefore, it is critical to promote
Jo
the rapid expansion of commercial banks and allocate more bank loans to financially
constrained firms.
21
References
Acemoglu, D., 1995. Reward structures and the allocation of talent. European Economic Review, 39(1), 17-
33.
Acharya, V.V., Baghai, R.P., Subramanian, K.V., 2014. Wrongful discharge laws and innovation. Review of
Financial Studies, 27(1), 301-346.
Allen, F., Qian, J., Qian, M., 2005. Law, finance, and economic growth in China. Journal of Financial
Economics, 77(1), 57-116.
Almeida, H., Campello, M., Weisbach, M., 2004. The cash flow sensitivity of cash. Journal of Finance, 59(4),
1777-1804.
Amore, M., Schneider, C., Zaldokas, A., 2013. Credit supply and corporate innovation. Journal of Financial
f
oo
Economics, 109(3), 835-855.
Avetisyan, E., Baruch, Y., Meschi, P. X., Metais, E., & Norheim-Hansen, A., 2020. Tying the Acquirer’s
r
Human Resource Management Quality to Cross-Border Acquisition Divestment Probability: Curvilinear
-p
Connection with Slacklining. British Journal of Management, 31(3), 568–588.
re
Bae, K. H., Bailey, W., Kang, J., 2021.Why is stock market concentration bad for the economy? Journal of
Financial Economics,140(2),436-459.
lP
Baumol, W.J., 1990. Entrepreneurship: Productive, unproductive, and destructive. Journal of Political
Economy, 98(5), 893-921.
na
Bayer, C., 2006. Investment dynamics with fixed capital adjustment cost and capital market imperfections.
Journal of Monetary Economics, 53(8), 1909-1947.
ur
Benfratello, L., Schiantarelli, F., Sembenelli, A., 2008. Banks and innovation: Microeconometric evidence
Jo
on Italian firms. Journal of Financial Economics, 90(2), 197-217.
Bester, H., 1985. Screening and Rationing in Credit Market with Imperfect Information. American Economic
Review, 75(4), 850-855.
Bontis, N., Serenko, A., 2009. A causal model of human capital antecedents and consequents in the financial
services industry. Journal of Intellectual Capital, 10(1), 53-69.
Boyd, J.H., Prescott, E.C., 1986. Financial intermediary-coalitions. Journal of Economic Theory, 38(2), 211-
232.
Boyreau-Debray, G., Wei, S.J., 2005. Pitfalls of state-dominated financial system: The case of China. NBER
Working Paper No.11214.
Braggion, F., Ongena, S., 2017. Banking sector deregulation, bank-firm relationships and corporate leverage.
Economic Journal, 129(2), 1-25.
Brown, J.R., Fazzari, S.M., Petersen, B.C., 2009. Financing innovation and growth: Cash flow, external
equity, and the 1990s R&D boom. Journal of Finance, 64(1), 151-185.
Brown, J.R., Martinsson, G., Petersen, B.C., 2012. Do financing constraints matter for R&D? European
22
Economic Review, 56(8), 1512-1529.
Brown, J.R., Martinsson, G., Petersen, B.C., 2013. Law, stock markets, and innovation. Journal of Finance,
68(4), 1517-1549.
Cahuc, P., Challe, E., 2012. Produce or speculate? Asset bubbles, occupational choice, and efficiency.
International Economic Review, 53(4), 1105-1131.
Caprio, G., Laeven, L., Levine R. Governance and bank valuation. Journal of Financial Intermediation, 16(4),
584-617.
Carpenter, R.E., Petersen, B.C., 2002. Capital market imperfections, high-tech investment, and new equity
financing. Economic Journal, 112(477), 54-72.
Casu, B., Girardone, C., 2009. Competition issues in European banking. Journal of Financial Regulation and
Compliance, 17(2), 119-133.
f
oo
Chaney, T., Sraer, D., Thesmar, D., 2012. The collateral channel: How real estate shocks affect corporate
investment. American Economic Review, 102(6), 2381-2409.
r
Chang, X., Chen, Y., Wang, S.Q., Zhang, K., Zhang, W., 2019. Credit default swaps and corporate innovation.
-p
Journal of Financial Economics, 134(2), 474-500.
re
Chang, X., Dasgupta, S., Hilary, G., 2006. Analyst coverage and financing decisions. Journal of Finance,
61(6), 3009-3048.
lP
Chava, S., Oettl, A., Subramanian, A., Subramanian, K.V., 2013. Banking deregulation and innovation.
Journal of Financial Economics, 109(3), 759-774.
na
Che, Y., Zhang, L., 2018. Human capital, technology adoption and firm performance: Impacts of China’s
higher education expansion in the late 1990s. Economic Journal, 128(614), 2282-2320.
ur
Cornaggia, J., Mao, Y., Tian, X., Wolfe, B., 2015. Does banking competition affect innovation? Journal of
Jo
Financial Economics, 115(1), 189-209.
D'Acunto, F., Frésard, F., 2018. Finance, talent allocation, and growth. CESifo Working Paper No.6883.
De la Fuente, A., Marín, J.M., 1996. Innovation, bank monitoring, and endogenous financial development.
Journal of Monetary Economics, 38(2), 269-301.
Dong, M., Hirshleifer, D., Teoh, S.H., 2012. Overvalued equity and financing decisions. Review of Financial
Studies, 25(12), 3645-3683.
Du, J., Li, C., Wang, Y., 2023. Shadow banking of nonfinancial firms: Arbitrage between formal and informal
credit markets in China. Journal of Financial Intermediation, 55, 101032.
Dyck, A., Zingales, L., 2004. Private benefits of control: An international comparison. Journal of Finance,
59(2), 537-600.
Ebeke, C., Omgba, L.D., Laajaj, R., 2015. Oil, governance and the (mis)allocation of talent in developing
countries. Journal of Development Economics, 114, 126-141.
Fafchamps, M., Quisumbing, A.R., 1999. Human Capital, productivity, and labor productivity in rural
23
Pakistan. Journal of Human Resources, 34(2), 369-406.
Fan, G., Wang, X., Zhu, H., 2011. NERI index of marketization for China’s provinces: 2011 report (in
Chinese). Economic Science Press: Beijing.
Fang, L.H., Lerner, J., Wu, C., 2017. Intellectual property rights protection, ownership, and innovation:
Evidence from China. Review of Financial Studies, 30(7), 2446-2477.
Fazzari, S., Hubbard, R., Petersen, B., 1988. Financing constraints and corporate investment. Brookings
Papers on Economic Activity, 1, 141-195.
Gennaioli, N., Shleifer, A., Vishny, R., 2014. Finance and the preservation of wealth. Quarterly Journal of
Economics, 129(3), 1221-1254.
Giroud, X., Mueller, H.M., 2011. Corporate governance, product market competition, and equity prices.
Journal of Finance, 66(2), 563-600.
f
oo
Goldin, C., Katz, L.F., 2008. Transitions: Career and family life cycles of the educated elite. American
Economic Review Papers and Proceedings, 98(2), 263-269.
r
Greenwood, J., Jovanovic, B., 1990. Financial development, growth, and the distribution of income. Journal
-p
of Political Economy, 98(5): 1076-1107.
re
Greenwood, J., Sanchez, J., Wang, C., 2010. Financing development: The role of information costs. American
Economic Review, 100(4), 1875-1891.
lP
Greenwood, R., Scharfstein, D., 2013. The growth of finance. Journal of Economic Perspectives, 27(2), 3-
28.
na
Grieser, W., Liu, Z., 2019.Corporate Investment and Innovation in the Presence of Competitor
Constraints.The Review of Financial Studies,32(11),4271-4303.
ur
Gu, L., Ni, X., Peng, Y., Zhang, H., 2020. Entry of foreign banks, state ownership, and corporate innovation.
Jo
Pacific-Basin Finance Journal, 61, 101340.
Gurd, B., Helliar, C. 2017. Looking for leaders: ‘Balancing’ innovation, risk and management control systems.
The British Accounting Review, 49(1), 91-102
Hart, O.D., 1983. The market mechanism as an incentive scheme. Bell Journal of Economics, 14(2), 366-
382.
He, J., Tian, X., 2016. The dark side of analyst coverage: The case of innovation. Journal of Financial
Economics. Journal of Financial Economics, 109(3), 856-878.
Hirshleifer, D., Low, A., Teoh, S. H. 2012.Are Overconfident CEOs Better Innovators?. The Journal of
finance, 67(4),1457-1498.
Hsieh, C.T., Hurst, E., Jones, C.I., Klenow, P.J., 2019. The allocation of talent and U.S. economic growth.
Econometrica, 87(5), 1439-1474.
Hsu, P.H., Tian, X., Xu, Y., 2014. Financial development and innovation: Cross-country evidence. Journal of
24
Hubbard, R.G., 1998. Capital market imperfections and investment. Journal of Economic Literature, 36(1),
193-225.
Islam, E., Zein, J., 2020.Inventor CEOs. Journal of Financial Economics,135(2), 505-527.
Kaplan, S., Zingales, L., 1997. Do financing constraints explain why investment is correlated with cash flow?
Quarterly Journal of Economics, 112(1), 169-215.
Levine, R., 2002. Bank-based or market-based financial systems: Which is better? Journal of Financial
Intermediation, 11(4), 398-428.
Lin, J.Y., Sun, X., Wu, H.X., 2015. Banking structure and industrial growth: Evidence from China. Journal
of Banking and Finance, 58, 131-143.
Liu, G., Zhang, C., Zhu, Y., 2020. The interest group theory of banking sector expansion in China: Evidence
from a quasinatural experiment. Journal of International Money and Finance, 107, 102225.
f
oo
Liu, Q., Qiu, L.D., 2016. Intermediate input imports and innovations: Evidence from Chinese firms’ patent
filings. Journal of International Economics, 103, 166-183.
r
Lu, S.F., Yao, Y., 2009. The effectiveness of law, financial development, and economic growth in an economy
-p
of financial repression: Evidence from China. World Development, 37(4), 763-777.
re
Machokoto, M., Gyimah, D., Ntim, C.G. 2021. Do peer firms influence innovation? The British Accounting
Review, 53(5), 100988.
lP
Moshirian, F., Tian, X., Zhang, B., Zhang, W., 2021. Stock market liberalization and innovation. Journal of
na
Moulton, B., 1990. An illustration of a pitfall in estimating the effects of aggregate variables on micro unit.
Review of Economics and Statistics, 72(2), 334-338.
ur
Murphy, K.M., Shleifer, A., Vishny, R.W., 1991. The allocation of talent: Implications for growth. Quarterly
Jo
Journal of Economics, 106(2), 503-530.
Nguyen, L., Vu, L., Yin, X. 2020. The undesirable effect of audit quality: Evidence from firm innovation.
The British Accounting Review, 52(6), 100938.
Paravisini, D., 2008. Local bank financial constraints and firm access to external finance. Journal of Finance,
63(5), 2161-2193.
Philippon, T., 2010. Financiers versus engineers: Should the financial sector be taxed or subsidized?
American Economic Journal: Macroeconomics, 2(3), 158-182.
Philippon, T., 2015. Has the US finance industry become less efficient? On the theory and measurement of
financial intermediation. American Economic Review, 105(4), 1408-1438.
Philippon, T., Reshef, A., 2012. Wages and human capital in the U.S. finance industry: 1909-2006. Quarterly
Journal of Economics, 127(4), 1551-1609.
Philippon, T., Reshef, A., 2013. An international look at the growth of modern finance. Journal of Economic
Perspectives, 2013, 27(2), 73-96.
25
Poncet, S., Steingress, W., Vandenbussche, H., 2010. Financial constraints in China: Firm-level evidence.
China Economic Review, 21(3), 411-422.
Prud'Homme, D., 2017. Utility model patent regime “strength” and technological development: Experiences
of China and other East Asian latecomers. China Economic Review, 42, 50-73.
Rajan, R.G., Zingales, L., 2003. The great reversals: The politics of financial development in the twentieth
century. Journal of Financial Economics, 69(1), 5-50.
Song, Z., Storesletten, K., Zilibotti, F., 2011. Growing like China. American Economic Review, 101(1), 196-
233.
Tian, X., Wang. T.Y., 2014. Tolerance for failure and corporate innovation. Review of Financial Studies,
27(1), 211-255.
Tong, T.W., Zhang, K., He, Z.L., Zhang, Y., 2018. What determines the duration of patent examination in
f
oo
China? An outcome-specific duration analysis of invention patent applications at SIPO. Research Policy,
47(3), 583-591.
r
Wang, C.W., Chiu, W.C., King, T.H.D., 2020. Debt maturity and the cost of bank loans. Journal of Banking
and Finance, 112,105235. -p
re
lP
na
ur
Jo
26
Total patent application Total patent grant
5
4
4
3
3
2
f
1
r oo
0
.9 1 1.1 1.2
Financial sector's human capital
1.3
-p .9 1 1.1 1.2
Financial sector's human capital
1.3
re
Fig. 1. The financial sector’s human capital and corporate innovation This figure shows the correlation
between human capital in the financial sector and a firm’s innovation productivity, which is measured by the
lP
number of total patent applications and total patent grants.

na
ur
Jo
27
Table 1
Summary statistics. This table reports the descriptive statistics (including the mean and standard deviation)
of the variables defined in Appendix Table A1.
Variable Obs. Mean Std. Dev Min Max
Total patent application 6375 2.929 1.504 0 6.678
Total patent grant 6375 2.673 1.419 0 6.347
Invention patent application 6375 2.045 1.403 0 5.832
Noninvention patent application 6375 2.338 1.545 0 6.157
Invention patent grant 6375 1.378 1.170 0 4.820
Noninvention patent grant 6375 2.299 1.516 0 6.116
Financial sector’s human capital 6375 1.166 0.066 0.908 1.332
Government expenditure 6375 0.129 0.047 0.054 0.406
Urbanization rate 6357 0.981 0.082 0.174 1.014
f
Real GDP per capita 6375 11.163 0.610 8.704 13.056
oo
Industrial structure 6375 0.489 0.076 .192 0.880
Firm size 6375 21.718 1.114 19.876 25.084
r
Firm age 6375 1.693 0.907 0 3.091
Return on assets
Sale growth
-p
6375
5838
0.044
0.148
0.048
0.328
-0.140
-0.420
0.185
1.818
re
Tobin’s Q 6375 2.119 1.253 0.950 8.012
Stock volatility 6334 0.032 0.011 0.016 0.065
lP
na
ur
Jo
28
Table 2
The human capital and innovation quantity of the financial sector. This table reports the estimation results of
the impact of the financial sector’s human capital on innovation quantity. The dependent variable is set as the
number of total patent applications and grants. The other variables are defined in Appendix Table A1. All
standard errors clustered by firms are shown in parentheses. *, **, and *** denote the 10%, 5%, and 1%
significance levels, respectively.
Variable
(1) (2) (3) (4) (5) (6)
*** *** *** *** ***
1.109 1.217 0.864 0.920 1.117 0.752**
Financial sector’s human capital
(0.334) (0.302) (0.319) (0.318) (0.287) (0.305)
-0.962* -1.057** -0.808 -0.872*
Government expenditure
(0.555) (0.506) (0.503) (0.476)
1.019*** 0.905*** 0.845** 0.849**
Urbanization rate
f
(0.359) (0.332) (0.354) (0.336)
oo
0.221*** 0.245*** 0.227*** 0.241***
Real GDP per capita
(0.046) (0.045) (0.044) (0.043)
r
-0.953*** -0.785*** -0.688** -0.590**
Industrial structure
(0.313)
-p
0.540***
(0.299)
0.534***
(0.297)
0.508***
(0.288)
0.504***
re
Firm size
(0.024) (0.024) (0.023) (0.023)
-0.061** -0.052* -0.066** -0.058**
lP
Firm age
(0.030) (0.030) (0.028) (0.028)
3.828*** 3.836*** 2.750*** 2.746***
Return on assets
na
(0.417) (0.415) (0.397) (0.393)

0.066 0.063 0.031 0.027
Sale growth
ur
(0.063) (0.063) (0.060) (0.060)

0.013 0.007 -0.004 -0.009
Tobin’s Q
Jo
(0.019) (0.019) (0.018) (0.018)

11.611*** 9.870*** 9.141*** 7.650**
Stock volatility
(3.658) (3.642) (3.370) (3.355)
-1.321** -11.359*** -13.219*** -1.620*** -10.793*** -12.757***
Constant
(0.617) (0.673) (0.793) (0.581) (0.635) (0.760)
Province FE Yes Yes Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes Yes Yes
Obs. 6,357 5,804 5,793 6,357 5,804 5,793
Adjusted R2 0.067 0.197 0.207 0.066 0.190 0.200
29
Table 3
The human capital and innovation quality of the financial sector This table reports the estimation results of
the impact of the financial sector’s human capital on innovation quality. The dependent variable is set as the
number of applications and grants for invention patents and noninvention patents, respectively. The other
variables are defined in Appendix Table A1. All standard errors clustered by firms are shown in parentheses.
* **
, , and *** denote the 10%, 5%, and 1% significance levels, respectively.
Patent application Patent grant
Variable Invention Noninvention Invention Noninvention
(1) (2) (3) (4)
*** ***
0.942 0.393 0.674 0.449
(0.298) (0.334) (0.253) (0.336)
City-level controls Yes Yes Yes Yes
Firm-level controls Yes Yes Yes Yes
f
Province FE Yes Yes Yes Yes
oo
Industry FE Yes Yes Yes Yes
Obs. 5,793 5,793 5,793 5,793
r
Adjusted R2 0.230 0.167 0.219 0.161
-p
re
lP
na
ur
Jo
30
Table 4
An instrument variable approach. This table reports the estimation results of the impacts of the financial sector’s human capital on innovation quantity and quality based
on an instrumental variable approach. Specifically, the first instrumental variable is a dummy variable (historical heavy industrial base) depicting whether a city was
one of the historical heavy industrial bases in the early years of New China, and the second instrumental variable is the natural logarithm of money houses in the late
Qing dynasty (number of money houses) at the city level. In column 1, the dependent variable is set as the financial sector’s human capital across prefecture-level cities.
In columns 2–7, the dependent variable is set as the number of applications and grants for total patents, invention patents and noninvention patents, respectively. The
other variables are defined in Appendix Table A1. All standard errors clustered by firms are shown in parentheses. *, **, and *** denote the 10%, 5%, and 1% significance
levels, respectively.
First stage Second stage
Variable Financial sector’s human capital
f
Total Invention Noninvention Total Invention Noninvention
oo
(1) (2) (3) (4) (5) (6) (7)
-0.010***
Historical heavy industrial base
r
(0.002)
-p
11.011** 10.485** 4.488 9.867** 9.186** 3.107
re
(4.397) (4.540) (3.785) (4.104) (4.418) (3.132)
City-level controls Yes Yes Yes Yes Yes Yes Yes
lP
Firm-level controls Yes Yes Yes Yes Yes Yes Yes
Province FE Yes Yes Yes Yes Yes Yes Yes
Yes Yes Yes Yes Yes Yes Yes
na
Industry FE
Obs. 5,793 5,793 5,793 5,793 5,793 5,793 5,793
Adjusted R2 0.3521
Cragg-Donald Wald F-statistic
ur 821.44 647.87 1084.26 825.14 642.74 1088.03
Jo
Variable Financial sector’s human capital
Total Invention Noninvention Total Invention Noninvention
0.138***
Number of money houses
(0.029)
3.427*** 2.819** 1.988 2.936** 2.748** 1.523
(1.0685) (1.395) (1.357) (1.267) (1.355) (1.606)
City-level controls Yes Yes Yes Yes Yes Yes Yes
Firm-level controls Yes Yes Yes Yes Yes Yes Yes
Province FE Yes Yes Yes Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes Yes Yes Yes
Obs. 4,887 4,887 4,887 4,887 4,887 4,887 4,887
Adjusted R2 0.4523
Cragg-Donald Wald F-statistic 210.43 202.91 286.75 213.66 201.98 291.42
31
Table 5
A time-variant measure of financial sector’s human capital. This table reports the estimation results using a
newly constructed explanatory variable, which is defined as the city-level financial sector’s human capital
times a time series indicator at the national level. The dependent variable is set as the number of applications
and grants for total patents, invention patents and noninvention patents. The other variables are defined in
Appendix Table A1. All standard errors clustered by firms are shown in parentheses. *, **, and *** denote the
10%, 5%, and 1% significance levels, respectively.
Variable Total Invention Noninvention Total Invention Noninvention
(1) (2) (3) (4) (5) (6)
2.312*** 1.988*** 0.953 2.251** 1.955** 0.517
(0.808) (0.738) (0.684) (0.929) (0.857) (0.912)
City-level controls Yes Yes Yes Yes Yes Yes
f
oo
Firm-level controls Yes Yes Yes Yes Yes Yes
Firm FE Yes Yes Yes Yes Yes Yes
r
Year FE Yes Yes Yes Yes Yes Yes
Obs.
Adjusted R 2
5,793
0.299
-p
5,793
0.300
5,793
0.314
5,793
0.258
5,793
0.303
5,793
0.257
re
lP
na
ur
Jo
32
Table 6
Additional robustness checks. This table reports the estimation results of several robustness checks. Panel A
reports the results using the subsample from 2013 to 2017. Panel B reports the results using the subsample
after excluding special cities, namely, provincial capitals, centrally administered municipalities and cities
specifically designated in the state plan. Panel C reports the results of cross-sectional regressions based on
the sample mean over 2009–2017. Panel D reports the results allowing for standard errors clustered at the
city and year levels. Panel E reports the results controlling for the local labor market. The dependent variable
is set as the number of applications and grants for total patents, invention patents and noninvention patents.
The other variables are defined in Appendix Table A1. All standard errors clustered by firms are shown in
parentheses. *, **, and *** denote the 10%, 5%, and 1% significance levels, respectively.
Variable Total Invention Noninvention Total Invention Noninvention
(1) (2) (3) (4) (5) (6)
Panel A: Subperiod 2013-2017
0.937** 0.878** 0.531 0.711* 0.676** 0.423
(0.410) (0.386) (0.431) (0.391) (0.334) (0.431)
f
oo
Obs. 3,672 3,672 3,672 3,672 3,672 3,672
r
Adjusted R2 0.203 0.223 0.168 0.195 0.203 0.160
Panel B: Excluding special cities
-p
1.458*** 1.581***
(0.413) (0.372)
0.613
(0.445)
1.264*** 1.126***
(0.396) (0.319)
0.522
(0.450)
re
lP

Obs. 2,985 2,985 2,985 2,985 2,985 2,985
Adjusted R2 0.238 0.254 0.189 0.218 0.223 0.174
na
Panel C: Cross-sectional regression

1.1795* 1.0252* 0.8752 1.1596** 0.8555* 0.9759
(0.6152) (0.5603) (0.6311) (0.5853) (0.4549) (0.6382)
ur

Jo

Obs. 1,434 1,434 1,434 1,434 1,434 1,434
Adjusted R2 0.2101 0.2226 0.1818 0.2126 0.2062 0.1825
Panel D: Adjusted standard errors
0.864** 0.942** 0.393 0.752* 0.674** 0.449
(0.423) (0.430) (0.420) (0.430) (0.328) (0.443)
Obs. 5,793 5,793 5,793 5,793 5,793 5,793
Adjusted R2 0.207 0.230 0.167 0.200 0.219 0.161
Panel E: Controlling for local labor market
0.704** 0.749** 0.341 0.541* 0.472* 0.314
(0.326) (0.305) (0.343) (0.310) (0.261) (0.343)
Obs. 5,532 5,532 5,532 5,532 5,532 5,532
Adjusted R2 0.202 0.230 0.160 0.189 0.211 0.150
33
Table 7
Mechanistic tests. This table reports the estimation results of the impact of the financial sector’s human capital on firms’ credit constraints. Column 1 reports the
estimation results using the data of prefecture-level cities, while columns 2–5 report the estimation results using the data of nonfinancial listed firms. The dependent
variable is set as the ratio of city-level loans provided by financial institutions to GDP, the ratio of net change in total liabilities to total assets, the ratio of interest
expenses to total debt, and the ratio of fixed assets investment and R&D investment to total assets. The other variables are defined in Appendix Table A1. All standard
errors clustered by firms are shown in parentheses. *, **, and *** denote the 10%, 5%, and 1% significance levels, respectively.
City-level evidence Firm-level evidence
Variable New loans Debt issuance Cost of debt Fixed assets investment R&D investment
f
oo
(1) (2) (3) (4) (5)
*** ** *** *
0.735 0.046 -0.017 0.035 0.007**
r
-p
(0.155) (0.023) (0.007) (0.018) (0.003)
re
-0.063***
Financial sector’s human capital×Cash flow
(0.020)
lP
0.0732***
Cash flow
na
(0.0240)
City-level controls Yes Yes Yes Yes Yes
Firm-level controls
ur Yes Yes Yes Yes Yes
Jo
Province FE Yes Yes Yes Yes Yes
Industry FE Yes Yes Yes Yes Yes
Obs. 1,117 4,524 5,527 5,761 5,711
2
Adjusted R 0.6520 0.2390 0.1400 0.1445 0.1709
34
Table 8
Key role of R&D intensity. This table reports the estimation results of heterogeneous impacts based on firms’
R&D intensity. In Panels A, B and C, a firm’s R&D intensity is defined as the number of total patent
applications, the ratio of R&D investment to total assets and whether it is a high-tech firm, respectively. A
firm is classified into the high (low) group if its R&D intensity in 2007 is above (below) the sample median
of the index or if it is a high-tech firm. The dependent variable is set as the number of applications for total
patents, invention patents and noninvention patents. The other variables are defined in Appendix Table A1.
All standard errors clustered by firms are shown in parentheses. *, **, and *** denote the 10%, 5%, and 1%
Panel A: Total patent application in 2007
Total Invention Noninvention
Variable High Low High Low High Low
(1) (2) (3) (4) (5) (6)
*** *** * **
1.073 0.203 1.120 0.524 0.760 -0.555
f
oo
(0.253) (0.346) (0.349) (0.299) (0.322) (0.353)
r
Province FE
Industry FE
Yes
Yes
-p Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
re
Obs. 2,908 2,885 2,908 2,885 2,908 2,885
2
Adjusted R 0.270 0.047 0.275 0.058 0.155 0.042
lP
Panel B: R&D investment in 2007

na
(1) (2) (3) (4) (5) (6)

*** *** ***
1.697 -0.565 1.471 -0.080 1.303 -0.626
ur
(0.380) (0.519) (0.371) (0.456) (0.431) (0.524)

Jo

Obs. 2,929 2,864 2,929 2,864 2,929 2,864
Adjusted R2 0.342 0.175 0.360 0.202 0.257 0.153
Panel C: High-tech firms
Variable Yes No Yes No Yes No
(1) (2) (3) (4) (5) (6)
*** ** *
1.623 0.367 1.100 0.208 0.868 -0.197
(0.471) (0.395) (0.450) (0.366) (0.504) (0.415)
Obs. 1,784 3,884 1,784 3,884 1,784 3,884
Adjusted R2 0.258 0.207 0.300 0.224 0.210 0.168
35
Table 9
Key role of financial constraints. This table reports the estimation results of heterogeneous impacts based on
firms’ financial constraints. In Panels A and B, a firm’s financial constraint status is defined as its ownership
and the KZ index prosed by Kaplan and Zingales (1997), respectively. A firm is classified into the
unconstrained (constrained) group if its ownership is an SOE (non-SOE) or if its KZ value in 2007 was below
(above) the sample median of the index. The dependent variable is set as the number of applications for total
Panel A: Ownership
Variable SOEs Non-SOEs SOEs Non-SOEs SOEs Non-SOEs
(1) (2) (3) (4) (5) (6)
f
oo
*** ***
0.086 1.369 0.701 1.219 -0.578 0.958**
(0.605) (0.383) (0.557) (0.361) (0.615) (0.407)
r
Firm-level controls
Province FE
Yes
Yes
-p Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
re
Obs. 1,832 3,961 1,832 3,961 1,832 3,961
lP
2
Adjusted R 0.247 0.207 0.257 0.234 0.224 0.161
Panel B: The KZ index in 2007
na

Variable Low High Low High Low High
ur
(1) (2) (3) (4) (5) (6)

** ***
0.619 1.048 0.574 1.349 0.184 0.456
Jo

(0.396) (0.528) (0.386) (0.472) (0.425) (0.546)
Obs. 3,050 2,743 3,050 2,743 3,050 2,743
2
Adjusted R 0.199 0.234 0.219 0.257 0.160 0.198
36
Table 10
Key role of industry competition. This table reports the estimation results of heterogeneous impacts based on
industry competition. A firm’s industry competition is defined as the HHI of sales, and it is classified into the
low (high) group if its HHI value in 2007 is above (below) the sample median of the index. The dependent
variable is set as the number of applications for total patents, invention patents and noninvention patents. The
other variables are defined in Appendix Table A1. All standard errors clustered by firms are shown in
parentheses. *, **, and *** denote the 10%, 5%, and 1% significance levels, respectively.
Variable Low High Low High Low High
(1) (2) (3) (4) (5) (6)
** ***
0.951 0.142 1.393 -0.368 -0.037 0.530
(0.389) (0.496) (0.372) (0.452) (0.429) (0.504)
f
oo
r
Obs.
Adjusted R 2
2,999
0.356
-p 2,794
0.165
2,999
0.374
2,794
0.193
2,999
0.271
2,794
0.154
re
lP
na
ur
Jo
37
Table 11
Key role of local macroeconomic conditions. This table reports the estimation results of heterogeneous
impacts based on city characteristics. In Panel A, we measure a city’s macroeconomic conditions using bank
density measured by the ratio of the number of commercial bank branches to the total population, and a city
is classified into the high (low) group if its value in 2007 is above (below) the sample median of the index.
In Panel B, we measure a city’s macroeconomic conditions using the marketization level across provinces
proposed by Fan et al. (2009). A province is classified into the high (low) group if its value in 2007 is above
(below) the sample median of the index. The dependent variable is set as the number of applications for total
Panel A: Bank density in 2007
f
oo
(1) (2) (3) (4) (5) (6)
r
*** ***
-0.846 1.547 -0.667 1.720 -0.661 0.763*
City-level controls
(0.610)
Yes
-p (0.424)
Yes
(0.596)
Yes
(0.385)
Yes
(0.639)
Yes
(0.456)
Yes
re
lP

Obs. 2,976 2,817 2,976 2,817 2,976 2,817
na
2
Adjusted R 0.193 0.238 0.221 0.258 0.152 0.197
Panel B: Marketization level in 2007
ur

Jo
(1) (2) (3) (4) (5) (6)

** ** ** ***
0.845 1.520 0.768 2.031 0.402 0.836
(0.396) (0.591) (0.368) (0.551) (0.430) (0.594)
Obs. 3,509 2,284 3,509 2,284 3,509 2,284
2
Adjusted R 0.167 0.270 0.217 0.267 0.116 0.251
38
Appendix

8
6
6
4
Total patent grant
4
f
oo
2
2
r
-p
re
0
-.2 0 .2 .4 -.2 0 .2 .4
Debt issuance Debt issuance
lP
Fig. A1. Debt issuance and corporate innovation. This figure displays the correlation between a firm’s debt
na
issuance and innovation productivity, which is measured by the number of total patent applications and total
patent grants.
ur
Jo
39
Table A1
Definitions of key variables. This table presents the specific constructions of the key variables used in our paper.
Variable Definitions
Panel A: Firm-level variables
Total patent application Natural logarithm of one plus total patent application in year in year𝑡 + 1
Total patent grant Natural logarithm of one plus total patent grant in year𝑡 + 1
Invention patent application Natural logarithm of one plus invention patent application in year𝑡 + 1
Noninvention patent application Natural logarithm of one plus noninvention patent application in year𝑡 + 1
Invention patent grant Natural logarithm of one plus invention patent application in year𝑡 + 1
f
oo
Noninvention patent grant Natural logarithm of one plus noninvention patent application in year𝑡 + 1
Firm size Natural logarithm of total assets
r
Firm age Number of years after the firm’s establishment
-p
Return on assets Ratio of total profits to total assets
re
Sale growth Growth rate of sales revenue
Tobin’s Q Market value of equity plus book value of liabilities over book value of total assets
lP
Stock volatility Standard deviation of daily stock returns
Debt issuance Ratio of net change in total liabilities over total assets
na
Cost of debt Ratio of interest expenses to total liabilities
Fixed assets investment Ratio of fixed, intangible and other long-term assets expenditures over total assets
Cash flow
ur Ratio of earnings before interest, depreciation and taxes over total assets
Jo
R&D investment Ratio of R&D expenditures over total assets
Panel B: City-level variables
Financial sector’s human capital Ratio of a worker’s average years of schooling in the financial sector over that in the other sectors excluding finance
Historical heavy industrial base A dummy variable that equals 1 for historical heavy industrial bases and 0 otherwise
New loans Ratio of loans provided by financial institutions over GDP
Real GDP per capita Natural logarithm of real GDP (in 2000 constant price) divided by total population
Government expenditure Ratio of total fiscal expenditures to GDP
Urbanization rate Ratio of nonagriculture population to total population
Industrial structure Ratio of secondary industry output to GDP
40
Table A2
Increasing debt issuance: Supply or demand issue? This table explores how the impact of debt issuance on
the financial sector’s human capital varies with firms’ financial constraints. In Panels A and B, a firm’s
financial constraint status is defined as its ownership and the KZ index prosed by Kaplan and Zingales (1997),
respectively. A firm is classified into the unconstrained (constrained) group if its ownership is an SOE (non-
SOE) or if its KZ value in 2007 was below (above) the sample median of the index. The dependent variable
is set as the ratio of the net change in total liabilities to total assets. The other variables are defined in
Appendix Table A1. All standard errors clustered by firms are shown in parentheses. *, **, and *** denote the
10%, 5%, and 1% significance levels, respectively.
Debt issuance
Panel A: Ownership Panel B: The KZ index in 2007
Variable
SOEs Non-SOEs Low High
(1) (2) (3) (4)
f
oo
*
0.009 0.055 0.018 0.063**
(0.043) (0.028) (0.041) (0.026)
r
City-level controls Yes Yes Yes Yes
Firm-level controls
Province FE
Yes
Yes
-p Yes
Yes
Yes
Yes
Yes
Yes
re
Industry FE Yes Yes Yes Yes
Obs. 1,296 3,228 2,135 2,389
lP
2
Adjusted R 0.281 0.237 0.258 0.228
na
ur
Jo
41

1 s2.0 S0890838924001094 Main

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

1 s2.0 S0890838924001094 Main

Uploaded by

Copyright:

Available Formats

Journal Pre-proof

Guanchun Liu, Feng He, Chengsi Zhang, Saeed Akbar, Youwei Li

To appear in: The British Accounting Review

Received Date: 17 January 2023

© 2024 Published by Elsevier Ltd.

Renmin University of China, Beijing, P.R., China

asymmetry between the financial and productive sectors.

conduct an empirical analysis.

a significant and positive role in corporate innovation. On average, a one-standard deviation in

and processing, eventually leading to the accomplishment of credit contracts.

information asymmetry, high-quality innovation will benefit more.

3.1. Econometric specification

to our main hypothesis, we predict that 𝜗 is significantly positive.

3.2. Data and variable definitions

the financial sector’s human capital across 271 prefecture-level cities.

3.2.2. Measures of corporate innovation

responses of invention patents and noninvention patents. 5 Specifically, invention patent

filed (and eventually granted).

3.3. Stylized facts

[Insert Table 1 and Figure 1 about here]

[Insert Table 2 about here]

[Insert Table 3 about here]

[Insert Table 4 about here]

[Insert Table 6 about here]

4.3. Mechanism tests

[Insert Table 7 about here]

5.1.1. R&D intensity

[Insert Table 8 about here]

5.1.2. Financial constraints

[Insert Table 9 about here]

5.2. The key role of industry competition

in support of the prediction derived from our main hypothesis.

[Insert Table 10 about here]

5.3. The key role of local macroeconomic conditions

5.3.1. Bank density

[Insert Table 11 about here]

5.3.2. Marketization level

financial sector’s human capital on corporate innovation is greater in a highly information

on Italian firms. Journal of Financial Economics, 90(2), 197-217.

Financial Economics, 115(1), 189-209.

Pacific-Basin Finance Journal, 61, 101340.

Journal of Economics, 106(2), 503-530.

number of total patent applications and total patent grants.

(0.417) (0.415) (0.397) (0.393)

(0.063) (0.063) (0.060) (0.060)

(0.019) (0.019) (0.018) (0.018)

Province FE Yes Yes Yes Yes Yes Yes

Panel C: Cross-sectional regression

City-level controls Yes Yes Yes Yes Yes Yes

Province FE Yes Yes Yes Yes Yes Yes

Panel B: R&D investment in 2007

(1) (2) (3) (4) (5) (6)

(0.380) (0.519) (0.371) (0.456) (0.431) (0.524)

Firm-level controls Yes Yes Yes Yes Yes Yes

Total Invention Noninvention

(1) (2) (3) (4) (5) (6)

Financial sector’s human capital

Industry FE Yes Yes Yes Yes Yes Yes

Total Invention Noninvention

(1) (2) (3) (4) (5) (6)

Total patent application Total patent grant

You might also like