Does strict financial regulation promote Chinese firm innovation: evidence from the New Asset Management regulation

The impact of strict financial regulations on innovation in Chinese A-share listed companies was investigated using data spanning from 2014-2021. With New Asset Management Regulation (NAMR) as a quasi-natural experiment and random forest approaches, we demonstrate that financial regulation prevents firms' capital from 'real to virtual', thereby promoting innovation. Reducing debt financing costs and financial investments and easing financial constraints are the primary channels. Moreover, this effect is strong in regions with high levels of financial development and low levels of economic uncertainty.