Because the foreign exchange reserves reflect the imbalance of the global economy, we cannot fully explain the growth of the foreign exchange reserves solely from the perspective of one country. For foreign exchange reserves play a positive role in regulating the balance of payments and maintaining exchange rate stability, consideration must be given to the synergy of the reserve fluctuations and the economic links between countries. The literatures have mainly focused on the internal effects of foreign exchange reserves on China's economy, whereas this paper focuses on the international effects from an external perspective. Using the foreign exchange reserve unbalanced panel data from the WDI database, we explore the influence of the bilateral exchange rate systems, capital account openness, financial development, and other factors on the proportions of foreign exchange reserves held by two countries. The results of these analyses enable us to investigate the spillover effect of China's foreign exchange reserves and its impact on global asset allocation based on the gravity model. Our sample covers 199 countries and regions from 2000 to 2015, including developed countries, emerging market countries, and other developing countries. Compared with previous studies, our sample has the advantages of a long time span, large size, and diverse types of countries. The abundant national data also provide sufficient support for our empirical tests.
The ordinary least squares (OLS) regression results indicate that the spillover effect of China's foreign exchange reserves decreases in terms of geographical distance and is more significant between countries with linked bilateral exchange rate regimes, similar levels of financial development, and capital account openness with China. In addition, a common language, religion, and legal system reduces the difference in the proportion of foreign exchange reserves held by the two countries. To overcome the influence of heteroscedasticity and sample selection bias, we use the Poisson pseudo-maximum likelihood estimation (PPML) method to re-estimate the model. We use instrumental variables and conduct a two-stage least squares regression (2SLS) to deal with the endogeneity problem, and re-measure the foreign exchange reserve ratio, capital account openness, and level of financial development using alternative variables to test the robustness of our conclusions. Our conclusions are still robust after taking the sample selection bias, endogeneity, and variable measurement errors into consideration.
The main contributions of this paper are as follows. First, we provide a novel approach to understand the pattern of a country's foreign exchange reserves. Compared with the studies seeking to determine an appropriate scale of foreign exchange reserves, our analysis aims at how to achieve these produces more realistic meanings. Second, focusing on the international influence on China's foreign exchange reserves, this paper analyzes the channels of the spillover effects of foreign exchange reserves based on international crisis contagion theory. We examine direct channels, such as capital flows, trade spillovers, and credit channels, and indirect channels that affect investors' psychological expectations. Lastly, in view of the high explanatory power of the gravity model for international capital flows, we introduce the gravity model into the framework in an innovative manner and expand its practical application in the field of international finance.
Our findings highlight the strategic significance of strengthening the cooperation on the management of foreign exchange reserves between countries. For example, an inter-country foreign exchange reserve pool could be established, and national banks could collect foreign exchange reserves through capital subscriptions and bond issuances to meet their financing needs and jointly respond to international shocks. At the same time, different countries should coordinate their exchange rate policies, monetary policies, and capital control instruments to avoid competitive devaluation and control the degree of variation. Understanding the spillover effect of China's foreign exchange reserves can also help developing economies better understand the changing nature of foreign exchange reserves. This would not only help improve the management of large-scale foreign exchange reserves and defuse the international financial risks, but also help realize the goal of developing an international macroeconomic policy coordination mechanism and an international economic governance structure.

Demographic structure is one of the most important elements affecting the national economy through demographic dividends and the financial structure. The demand for financial assets is influenced by demographic structure, and it thus promotes the evolution of financial structure. We attempt to reveal the relationship between demographic structure and financial structure by analyzing both macro-level and micro-level data. First, based on the macro data, we find a close correlation between demographic and financial structures. The rise in the ageing population is accompanied by an indirect financing bias in the financial structure. Second, based on the China Household Finance Survey (CHFS), we attempt to explore the correlation between demographic and financial structures from the perspective of the demand side of financial assets at the micro level. Specifically, we examine the impact of demographic structure on household demand for risky financial assets, and then analyze the mechanism involved.
The contributions of this study to the literature could be summarized as fourfold. First, we provide a new element in the analysis of optimal financial structure, as demographic structure can affect the financial structure. Second, we improve the research method for macro-level analysis of the influence of demographic structure on asset demand. Third, we innovatively adopt the ordered probit model to investigate the impact of family demographics on family risk preference. Finally, we supplement the evidence on the factors influencing risk preference at the household level.
The empirical results show that an increase in the ratio of the aging population to the total population decreases the family's willingness to hold risky financial assets and the amount of risky financial assets. In addition, increase of the ratio of the ageing population to the total population will significantly reduces risk preference, which is an important mechanism through which the ageing population can affect the participation of risky financial assets. Under China's economic downturn, excess production capacity, and serious mismatch between supply and demand, supply-side structural reforms are gradually being implemented. At the same time, China's population aging problem is becoming more acute. The era of high economic growth brought about by the demographic dividend has passed.
Re-examining the impact of the huge changes in population structure on economic development will provide valuable suggestions for phased and regional policy adjustments. We find a very close relationship between population structure and financial structure as revealed in the cross-country/regional data. This could be driven by the declining preference for risk among the elderly population, and also indicates that the population structure affects the optimal financial structure, and the new optimal financial structure which in turn will influence the further acting on the real economy.
Combined with the empirical findings, the following insights emerge. First, against the background of gradually shrinking family sizes, the proportion of elderly people in the family is increasing, aggravating the burden of family pensions, and we could see negative effects on the level of risk tolerance and demand for risky financial assets. Therefore, when formulating long-term economic policy, the government should fully consider the trends and characteristics of the elderly population. Under the reality that the demographic dividend is disappearing, the government should act to prevent the adverse impact of the increasing pension burden on the financial market. Second, families holding different types of risky financial assets have different risk preferences. Therefore, when setting relevant monetary and fiscal policies and actively implementing market regulations, the government should seriously consider the characteristics and trends of the elderly populations in different regions. Differential incentive policies are recommended to effectively stimulate local economies according to their demographic structure.

The duty of the financial sector is to serve the real economy. In the new era, the core mission of the financial sector is to support high-quality development in the real economy. To this end, China's central government recently proposed a structural reform of the financial supply side. General Secretary Xi Jinping delivered an important speech to the Political Bureau of the Central Committee, emphasizing the need to deepen our understanding of the international and domestic financial situation and the structural reform of the financial supply to better service the real economy. The structural reform of China's banking industry is an important part of the structural reform of the financial supply side. With the continuous reform and opening up over the past four decades, the banking industry has gradually changed from a highly monopolized market structure to a more competitive one.
An important characteristic of the Chinese banking industry is its local markets, due to licensing controls and the restriction of business scope. The national commercial banks rely on local branches to compete with local, rural, and other commercial banks. Researchers thus need to measure the banking market structure at a more regional level. However, the lack of bank loan data at the regional level makes this difficult. Fortunately, the China Banking Regulatory Commission website provides unique data on the financial licenses of commercial bank branches, including information on the approval time and office location of each branch. We manually downloaded and collected the financial license information of all commercial bank branches, and constructed a municipal-level market structure measure.
Theoretically, there are two main views on banking market structure: the market power hypothesis and the information hypothesis. The basis of the market power hypothesis is classical industrial organization theory. Starting from the classical SCP monopoly leads to an insufficient loan supply and higher loan interest rates, while enhancing competition can reduce financing costs and increase credit. The market power hypothesis predicts a positive relation between competition in the banking sector and firm productivity. In contrast, the theoretical basis of the information hypothesis is information asymmetry. It considers that banks with strong market monopoly power are more likely to form long-term relations with borrower enterprises, and provide more contractual instruments to screen borrowers and reduce their moral hazard. As a result, more investment projects may receive bank loans, whereas market competition weakens the incentives for banks to establish good relations with enterprises and obtain corporate information, leading to a reduction in the availability of corporate finance.
Using a unique dataset for the period 2002-2007, we find that more intensive competition in the banking sector improves productivity, supporting the market power hypothesis. We also find strong evidence that financial constraints are reduced under a more competitive banking market structure. Furthermore, this effect is more pronounced for small enterprises, non-state-owned enterprises (NSOEs), young enterprises, and enterprises in high-tech industries.
The potential contributions of our paper are as follows. First, we construct the market structure of the Chinese banking industry at the municipal level, whereas most previous studies are concentrated at the national or provincial levels. Second, our findings complement the research on resource allocation and total factor productivity. While most discussion on this topic is focused on the impact of misallocation on total factor productivity, the more important issue is how to reduce the distortion of resource allocation. Third, our research is also related to the relationship between banking market structure and economic growth. We provide micro-level evidence based on enterprise data whereas most research is focused on the macro perspective. Last, our findings confirm the theory of optimal financial structure in economic development. According to this theory, China's optimal financial system should be dominated by small and medium regional banks rather than large banks.

For quite some time, national industrial policy in China has been a major policy instrument for macroeconomic regulation. The formulation and implementation of industrial policy is of great significance for the development of key strategic industries. A distinctive feature of China's industrial policy is the frequent interaction between industrial, fiscal, and monetary policies, forming a linkage mechanism. In most cases, fiscal and monetary policies are attached to industrial policies, resulting in their relative independence. This is key to understanding the effect of industrial policy and the macroeconomic regulation system in China, and also in interpreting industrial policy for high efficiency.
We investigate the causal relationship between national industrial policy and the fiscal and taxation policy of local governments. The contribution of this paper lies in absorbing the national industrial policy and the tax behavior of local governments into a unified analytical framework, and studying the role of local governments in implementing industrial policies through theoretical models.In additon, we focus on the changes in support of key industries from“Five-year Plan”, to identify the casual effect of industrial policy through micro data.
This paper studies the impact of national industrial policy on the effective tax rate of enterprises from the perspective of local government behavior. In our model, we treat the support of national industrial policy as a production factor, taking it into the production function of an industry. Based on previous studies, we anticipate that national industrial policy will lead to an increasing rate of capital return in the key industries via project investment and supporting policies. Local governments aim at regional economic development and increasing fiscal revenue, whose utility level depends on the gross production of all industries and unproductive consumption in the region. They have to make a tradeoff, given the support for key industries by national policy. On one hand, local governments can reduce the effective tax rate of key industries to attract more capital and increase gross production, and on the other, they can raise the effective tax rate of key industries to gain more fiscal revenue, with increasing unproductive consumption. Our theoretical analysis shows that industrial policy has led to an increased rate of capital return in the key industries, which imposes a tradeoff on local government between a tax reduction and a tax increase. When the local government tax rate is on the left side of the Laffer curve, the local government will reduce the effective tax rate of key industries.
Exploiting the national Five-Year Plan key industries to measure the industrial policies, we conduct an empirical test on the theoretical hypothesis.We find that industrial policy incentives significantly reduce the actual tax rate of the corresponding industries, and that the higher the local government fiscal revenue, the greater the decline in the effective tax rate. For industries obtaining ordinary support, the average decline in the effective tax rate is about 0.2 percent, while for industries obtaining key support it declines by 0.6 percent. Our analysis suggests that this results from reducing taxation for key industries. We further find that the reduction in the effective tax rate occurs mainly for private enterprises rather than local state-owned and central enterprises, partly due to the lower liquidity of state-owned capital. These findings are of great significance in understanding the role of local government in industrial policy and the coordination between industrial and fiscal policy.
This paper confirms the influence of national industrial policy on local taxation behavior, with the following policy implications. On the one hand, the behavior of local government are probably an important reason for the heterogeneous effects of national industrial policy. Thus, it is necessary to consider the influence of industrial policy on the incentive and capability of local governments, which impacts on policy implementation. On the other hand, the fiscal budget is another crucial constraint for industrial policy. We have to realize that the effects of industrial policy are much greater in regions with better economic development and more abundant fiscal resources than in other areas, which means that isolated industrial policies may broaden the gap in economic growth. It is thus of great importance to promote the coordination of industrial, fiscal, and monetary policy, such as introducing a preferential tax policy with a supportive credit policy to improve the efficiency of the industrial policy.

This paper analyzes the impact of privatization on enterprise innovation in an attempt to clarify whether privatization can promote the efficiency of state-owned enterprises (SOEs). The privatization of SOEs, in theory, has both positive and negative effects on enterprise innovation. On the one hand, privatization reduces government intervention and the policy burden of SOEs. The goal of privatized enterprises is no longer to be subordinate to the government or officials, but to maximize the value of the enterprise. At the same time, privatization alleviates the agency problem of SOEs, thus raising the level of risk-taking and enthusiasm for innovation. On the other hand, innovation has a high risk and failure rate, requiring a large amount of capital to maintain long-term investment in innovation. After enterprises are transformed from state-owned to private, they are likely to suffer from credit discrimination. Therefore, after privatization, the resource advantage of a former SOE is weakened, its financing is limited, and thus its innovation activities are restricted.
This paper tests whether privatization promotes or inhibits enterprise innovation, using non-listed companies in China's industrial enterprise database from 2005 to 2011 as sample. We use the difference in differences (DID) method and take the enterprises privatized from former SOEs as the treatment group and SOEs as the control group. The results show that innovation in privatized enterprises decreases significantly. We further test whether financial constraints are an important mechanism inhibiting the innovation of privatized enterprises. The results show that innovation decreases significantly in privatized enterprises with higher financial constraints, while there is no significant change in innovation in those with lower financial constraints. This suggests that financial constraints are an important factor restricting the innovation of privatized enterprises. Finally, we find that financial constraints significantly impede innovation of privatized enterprises in regions with underdeveloped financial market, which is not apparent in regions with developed financial market.
This paper makes three contributions. First, it enriches the literature on the impact of privatization on innovation from the perspective of financial constraints. Tan et al. (2015) and Zhong et al. (2016) use listed companies as samples to examine the impact of privatization on enterprise innovation, but do not reach a consistent conclusion. Importantly, both of the aforementioned papers ignore the impact of financial constraints on innovation. In this paper, non-listed companies that are more likely to be subject to financial constraints are used as the sample, and we find that financial constraints are a vital factor restraining the innovation of privatized enterprises. This paper thus expands the literature on the impact of privatization on innovation from the perspective of financial constraints.
Second, this paper extends the literature on the influence of financial markets on innovation from the perspective of privatization. We find that the development of a regional financial market within a country can alleviate the adverse impact of financial constraints on the innovation of privatized enterprises.
Third, this paper clarifies the controversy over privatization. The results imply that the privatization of SOEs does not necessarily succeed without a solution to the financial constraints on privatized enterprises and improvements in regional financial development to further alleviate this impediment to innovation of privatized enterprises.
This paper has important policy implications. On November 1, 2018, President Xi Jinping stressed the vital role of the private economy in China's economic development at the Private Enterprise Forum, and proposed to enhance financial support for private enterprises to solve the difficulties and costs of financing of private enterprises. Given the finding that the privatization of SOEs affects enterprise innovation, this paper proves the significance of alleviating the financial constraints on private enterprises and promoting the development of financial markets to promote innovation of private enterprises.

Recently, the dynamic adjustment of leverage has become a popular research topic. Theorists point out that each company has a target value of leverage, and lower or higher levels damage firm value. Therefore, when leverage deviates from the target value, the company has an incentive to adjust it towards the target value. However, due to the incompleteness of the market, many factors prevent companies from freely adjusting their leverage. This is especially pronounced in China, where high financing costs and a lack of financing opportunities delay leverage adjustment. Research has shown that a company's external financing environment has an important impact on the speed of leverage adjustment. Although industrial policy is considered an important institutional factor affecting a company's financing environment, we know of no research on whether and how industrial policy affects the speed of leverage adjustment, which provides us with a research opportunity.
As an important institutional background in China, industrial policy has a significant impact on the external financing environment of companies through direct intervention and indirect guidance, and may thus affect the speed of leverage adjustment. Direct intervention mainly includes technological control, environmental protection control, directory guidance, market access control, project approval control, etc., while indirect guidance includes fiscal subsidies, tax incentives, and financial policies aimed at ensuring the implementation of industrial policy. In terms of debt financing, industrial policies enable selected companies to be favored by banks and to be related with higher mortgage expectations, resulting in more loans and faster upward leverage adjustment. In terms of equity financing, industrial policies provide selected companies with more financing opportunities via SEO, etc.,which speeds up downward leverage adjustments. However, because the debt financing channel is dominant among Chinese listed companies, the main impact of industrial policies is likely to be faster upward leverage adjustment.
Drawing on a sample of Chinese A-share listed companies from 2006 to 2015, this article explores the influence of industrial policy on the speed of leverage adjustment during the eleventh and the twelfth five-year plans. Industrial policies are identified through policy documents and relevant literature and firm-level financial data is obtained from the CSMAR database. The empirical results reveal that support from industrial policies is associated with faster adjustment, and the effect is more pronounced in non-SOEs, smaller firms, and firms under more serious financial constraints. After separating the two adjustment directions, we show that being supported by industrial policies helps firms speed up upward adjustment and also helps firms with fewer fixed assets speed up downward adjustment. This article also indicates that debt financing is the main channel through which industrial policy affects the speed of leverage adjustment, and support from key industrial policies can affect how certain kind of firms adjust leverage via equity financing. Our results suggest that equity financing is still relatively costly compared with debt financing, and that companies still face many restrictions when attempting to obtain it.
This study contributes to the literature on industrial policy and leverage adjustment. It also provides direct empirical results on the channels of influence, enriching our perspective when evaluating the economic consequences of industrial policy. This study also has important policy implications. Considering the costs of capital market financing, providing companies with convenient debt financing channels can speed up leverage adjustment. We should also further improve the efficiency of the capital market, remove unnecessary policy barriers, reduce the transaction costs of equity financing, and provide more flexible ways for companies to quickly adjust their leverage. Future studies could focus on the impact of stock market reforms on the speed of leverage adjustment.

The commercial banking system in China has experienced a series of reforms since the launch of the opening-up policy. With the fast pace of marketization, competition in China's commercial banking industry has inevitably intensified, which has been a major trend over the past decade. The challenges facing this ever-evolving industry therefore lie in two aspects: how much has the market-oriented transformation affected the industry, and more essentially, can competition improve efficiency？
While most research has focused on the idiosyncratic characteristics of banks, this study provides additional information by looking at the role of external conditions and factors from a macro-economic perspective, thus being more policy relevant. The banks of interest are regional commercial banks, and central to our research question is the efficiency of commercial city banks. Although these banks are still much smaller in terms of market share than the larger national banks, their fast development, increasingly important role and potentially significant impact are not negligible. Given their large numbers, collectively they have the ability to affect the stability of the whole banking system, which should draw sufficient attention from regulators and policymakers. It is therefore of critical importance to analyze the efficiency problem of these banks, to provide further evidence not only for a retrospective view of the extant banking sector reforms, but more importantly for the construction of future regional financial development policies.
Our methodology comprises two main parts. First, we use stochastic frontier analysis (SFA) to estimate the operational efficiency of each bank; we then construct an econometric model to examine the impact of regional competition on bank operational efficiency.
The bank information in our study is collected from the annual reports of the banks and the BANKSCOPE database. Given that our sample is composed of city and rural commercial banks whose number was relatively small before 2003, we choose the sample period starting in 2004 and ending in 2015, and construct an unbalanced panel accordingly. Using the China Banking Regulatory Commission (CBRC) authorization information of bank branches, we construct a city level competition measure.
The empirical results show that competition can enhance the operational efficiency of regional commercial banks, although the positive impact differs across bank types. Moreover, the impact of competition on efficiency is nonlinear. Over-competition can induce negative effects. A series of robustness checks corroborate our conclusion. In addition, we test for the moderating effects of cross-regional operation by these banks on the relationship between competition and efficiency.
Our results have clear policy implications. First, a healthy financial system and ordered competition are key to improving bank operational efficiency; clear regional disparities in terms of development imply that regional-specific policies are required. Second, the impact of regional banking development differs across bank types, which provides empirical evidence to authorities for optimizing the banking structure. Third, both over-competition and over-monopolistic market conditions in the banking sector are shown to be harmful. Regulators should aim for an optimal level of competition and ensure a healthy market structure for the banking sector.
In general, this study makes the following innovations and contributions to the literature. (1) Using the CBRC branch authorization certificate information to construct a regional banking competition measure is novel. The data cover all information over time and provide comprehensive information objectively, which minimizes the possible influence of undesirable endogeneity. (2) The sample period of this study was especially important in the development of China's banking system. It not only covers the development of city and rural commercial banks from embryo to prosperity, but also highlights the critical transitions from local to cross-regional operation, thus giving us a unique and interesting perspective. (3) Methodologically, when testing for the typical competition–efficiency relationship, the transmission mechanisms are also analyzed and confirmed via a number robustness checks and a mediator effect model.

In recent years, the increasingly fierce competition in the rural financial markets has gradually eroded the monopoly position and competitive advantage of the rural credit cooperatives, leading to the emergence of frequent operational malpractices. In the process, many deep-seated problems, such as a chaotic property rights system, low financial service functions, and an excessive proportion of non-performing assets, have been exposed. To solve these problems,the rural credit cooperatives has begun to focus on banking reform. Nevertheless, there are still major differences between the different departments of the rural credit cooperatives. This issue mainly relates to the following three questions: If the rural commercial banks expand after the reform, will this affect the strategic positioning of the agricultural sector？ Can the management of rural commercial banks support a substantial expansion in size？ If the rural commercial banks maintain their current size, will they be able to meet the needs of service improvement？ Due to the lack of clear answers to the above questions, the issue of the size adjustment of rural commercial banks remains an open research question.
To address the problem of the size adjustment of rural commercial banks, we summarize the relevant local and international literature, and find that the literature is too narrowly focused and has generated controversial conclusions. The rural commercial banks have been burdened with the task of supporting agriculture since their inception. In recent years, with the introduction of market-oriented reforms, commercialization based targets have become equally important, such as improving profitability and reducing the operational risk. In this way, if the size adjustment is only analyzed in relation to one single target, it may be biased. Furthermore, the existing theoretical models examine commercial banks under the condition of a high level of marketization, which is not the case for a number of types of banks. Therefore, it is necessary to expand the model when discussing the size adjustment of rural commercial banks.
Drawing on the optimal size selection model for commercial banks developed by Krasa and Villamil (1992) and Lin and Sun (2007), combined with the particular characteristics of rural commercial banks, in this paper, we propose a new theoretical model of rural commercial banks, and explore the internal mechanisms of the size adjustment of rural commercial banks under different objectives, including the profit level, level of support for agriculture, and risk control. Then, using non-balanced panel data on 102 rural commercial banks from 2009 to 2016, we conduct an empirical analysis of a dynamic panel model to verify the conclusions of the theoretical model, and further analyze the most reasonable size interval for rural commercial banks. The following conclusions are drawn from the results of the model derivation and econometric tests. First, rural commercial banks can maximize their profit and minimize their operational risk through size adjustment. Specifically, maintaining a moderate size is more beneficial for improving profitability and reducing operational risk. Second, the expansion of the rural commercial banks inevitably shifts their focus away from agriculture so that they can offer high quality non-agricultural loans. Thus, the proportion of loans to support agriculture decreases, which weakens the support for agriculture. However, when the size of rural commercial banks exceeds a certain threshold, the proportion of agricultural loans begins to increase. Third, the results under the triple target constraint show that based on the current management levels, rural commercial banks are not suited to significant expansion and restricting the logarithm of their total assets within the optimal range can better balance the three goals.
Overall, this paper makes the following contributions to the literature. First, unlike the single goal perspective examined in the literature, we examine three goals, namely, the profit level, support for agriculture, and risk control to analyze the size adjustment of rural commercial banks. Second, this paper expands the original theoretical model of commercial banks, and establishes a new model for the size adjustment of rural commercial banks. Third, we test the conclusions of the theoretical model using a sample of 102 rural commercial banks, and explore the optimal size to better achieve the three goals using simulation graphs.

Innovation is one of the twin engines promoting China's economic growth and structural transformation. Whether small and micro enterprises can adapt to innovation requirements and challenges in the market is key to determining their future development and even the direction of the overall economy. Considering that a typical characteristic of small and micro enterprises is highly integrated management rights and ownership, we explore whether innovation consciousness and vitality can be improved by enhancing the human capital endowment of entrepreneurs in addition to the external mechanisms of enhancing financial support, providing government subsidies, and reducing the tax burden. This study examines the important role of financial literacy in promoting innovation consciousness and vitality in small and micro enterprises from the perspective of human capital theory.
First, financial literacy reflects the individuals' understanding of the economic and financial environment and their decision-making abilities. Entrepreneurs with high financial literacy can better understand the laws of economic development and thus foresee market opportunities because it is crucial for entrepreneurs to recognize innovation opportunities and prospects. Therefore, high financial literacy can effectively enhance innovation consciousness. Second, the inhibiting effect of formal financial credit constraints on innovation vitality has been widely proved. Because of unfamiliarity with the products, processes, and related policies of formal credit, people tend to show less credit demand, which induces demand-restrained credit constraints. Financial literacy can effectively improve the understanding of formal financial products and services, thereby alleviating such credit constraints and promoting innovation vitality. Based on the above analysis, we believe that financial literacy, as an aspect of human capital, influences innovation consciousness through a market cognition mechanism and innovation vitality through a credit constraint mechanism.
Based on data from the China Small and Micro Enterprises Survey (CMES), we identify the understanding and calculation of interest rates, inflation, and investment risk among small and micro entrepreneurs, and construct a financial literacy indicator using factor analysis. The empirical results show that financial literacy significantly improves the innovation consciousness of small and micro enterprises. Entrepreneurs care more about the innovation and novation abilities of employees, and the innovation vitality of the enterprise is also effectively improved. These results hold when using entrepreneur training experience or attention to economic and financial information as proxy variables for financial literacy and endogeneity testing. We also find a lower impact of financial literacy on technological innovation vitality compared with other types of innovation because credit constraints are secondary to those of technology and personnel. Moreover, we distinguish the market environment using the Fangang total market index, non-state-owned economic development index, and financial marketization index to verify the different mechanisms of financial literacy on innovation consciousness and vitality. In areas with high marketization, good non-state-owned economic development, and high financial marketization, small and micro enterprises have strong innovation vitality and weak innovation consciousness. The main role of financial literacy is to promote innovation consciousness through enhancing the market cognition mechanism. In areas with low marketization, poor non-state-owned economic development, and low financial marketization, small and micro enterprises have strong innovation consciousness and weak innovation vitality. The role of financial literacy lies mainly in promoting innovation vitality, that is, through the mechanism of alleviating demand-restrained credit constraints.
The findings of this study provide insight into how to improve the innovation consciousness and vitality of small and micro enterprises in different market environments. Future work could explore the influence of financial literacy on innovation efficiency. Furthermore, as financial literacy can effectively alleviate demand-restrained credit constraints, we provide a new way of solving the financing difficulties of small and micro enterprises.

Well-being is closely related to utility, and the literature is rich in factors that can influence well-being. Studies tend to use the terms “well-being” and “happiness” interchangeably. Some scholars point out that economic growth is unlikely to lead to happiness, but that economic crises, inflation, and unemployment reduce household well-being. From the perspective of income, some studies find that increased income does not significantly improve well-being, which is known as the happiness-income paradox. In this regard, scholars have proposed research perspectives such as an inverted U relationship between income and happiness, the effects of absolute and relative income on happiness, and the impact of income inequality on happiness. There are also studies on how the characteristics of individuals such as marriage, health, unemployment, social network relationships, and values affect happiness.
Nevertheless, there is scant evidence of the impact of household investment on well-being. Several studies find that household financial assets, property, liabilities, and investment performance affect household well-being, and that household assets can have a significant positive effect on happiness. However, the literature has not considered the impact of financial market participation or the risk level of financial investments on household well-being. Our research question is whether financial market participation can improve household well-being and whether the riskiness of financial investments has a heterogeneous impact.
First, we establish a theoretical model. Through our theoretical analysis, we find that financial market participation can affect household well-being through risks and returns. We then test the impact of financial market participation on household well-being using the 2015 China Household Finance Survey (CHFS) data. The CHFS includes detailed information on household assets and financial wealth, liabilities and credit constraints, income and insurance, and intergenerational transfers, demographics, and employment. We define household well-being through the CHFS questionnaire on the subjective well-being of respondents. We define households as participants in the financial market if they have demand deposits, time deposits, stocks, funds, financial products, bonds, derivatives, non-renminbi assets, gold, other financial assets, or any loans to others.
To address endogeneity concerns, we use an instrumental variable and employ maximum likelihood estimation. The results show that participation in the financial market will significantly increase the possibility of household well-being. When households participate in the financial market, the possibility of household well-being will be improved by 18.77%. We further find that the risk heterogeneity of financial investments has a significant impact on household well-being: participation in low-risk financial investment increases the likelihood of household well-being by 20.56%, whereas high-risk financial investment significantly reduces it by 17.75%.
We also find that participation in private lending significantly increases the likelihood of household well-being by 44.47%. The heterogeneous impact of private lending investment risk on well-being also exists. High-risk lending has a significant negative impact on happiness. This paper also finds that when households lend money to relatives, the likelihood of household well-being increases significantly by 7.58%.
This paper provides new evidence for understanding the relationship between household financial investment behavior and happiness, and also provides a reference for the construction of a harmonious society.

Firm operating efficiency is important to the whole economy, and clarification of the compensation distribution relationship between managers and ordinary employees under given resources has become an important issue.
There are two opposing theories on the relationship between the internal pay gap and firm value: tournament theory holds that expanding the internal pay gap is conducive to improved organizational performance (Lazear and Rosen 1981; Rosen 1986), whereas behavioral theory holds that this pay gap is not fully conducive to cooperation, and thus reduces organizational performance (Cowherd and Levine 1992; Carpenter and Sanders 2004). Arguments against and evidence for these two views appear in various studies (Pfeffer and Langton 1993; Williams et al. 2006; Lin et al. 2003; Zhang 2008; Liu and Sun 2010; Zhao 2012; Li and Hu 2012). This controversy prompts us to consider whether it is partly due to heterogeneous effects of the internal pay gap in different situations.
With this in mind, this study explores the question from the perspective of the firm life cycle. The life cycle is an important characteristic of a firm, and studies show that it greatly affects a firm's investments, financing, distribution, and other behavior (Anthony and Ramesh 1992; Bens et al. 2002; DeAngelo et al. 2006; DeAngelo et al. 2010; Hribar and Yehuda 2015). At different life cycle stages, managers and employees face different responsibilities and pressures; therefore, the same internal pay gap may produce different results.
Using a sample of A-share firms listed on the Shanghai and Shenzhen Exchanges from 2005 to 2014, we study the impact of firm life cycle on the relationship between the internal pay gap and firm value. We find that (1) the internal pay gap is conducive to overall firm value, which is consistent with tournament theory, (2) the promotion effect is strongest in the growing stage and weakens as the life cycle progresses, and (3) the main mechanisms are the importance of managers to firm performance and employee demand for equity. The above findings remain stable with other life cycle measurements.
The study makes three contributions. First, it shifts our understanding of the relationship between the internal pay gap and firm value from a static to a dynamic perspective. While examination of the internal pay gap and firm value has a long history, the literature has mainly taken a static approach (Zhang 2008, etc.), and ignored the dynamic impact of the internal pay gap at different stages of development. Based on the life cycle theory, this study predicts and finds that the internal pay gap has heterogeneous effects on firm value at different stages of the life cycle. It effectively links tournament theory and behavioral theory through the life cycle theory, placing them within a consistent discussion framework, with additional exploration of the mechanisms involved.
Second, although scholars have studied manager incentives in depth, this study emphasizes the importance of ordinary employees, who have received little attention in the past. Firm performance is a function of the productivity of both managers and ordinary employees, and the role of the ordinary employee should also be considered (Chen et al. 2015). Our findings show that in the actual compensation formulation, especially for mature firms and those in recession, the interests of ordinary employees need to be considered, and setting a reasonable pay gap is conducive to improved firm value. For the large number of firms newly listed on the Small and Medium Enterprise (SME) Board and Growth Enterprise Market (GEM) in China, managers should also be given sufficient reward for their efforts. Thus the findings of this study provide some theoretical references for the reform of income distribution.
Third, this study provides some guidance for research methods in future research. Unlike previous studies that rely on a single life cycle measurement method (Zhao and Sun 2005; Cao et al. 2010; Li et al. 2011; Li and Li 2012; Dong and Mao 2013; Luo and Li 2015), this study uses several life cycle measurement methods, including the comprehensive scoring method, retained earnings method, and enterprise-industry growth method, allowing for more stable conclusions and opening opportunities for future research in this field.