Human capital in the financial sector and corporate innovation: Evidence from China

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 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 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 as more highly educated workers flow into the financial sector, while the cost of debt and the cash flow sensitivity of fixed assets investment decrease, consistent with the credit constraints 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 asymmetry between the financial and productive sectors.