Breaking the Capacity Trap: How Capital Market Liberalization Drives Firm Capacity Utilization?

Overcapacity has persisted in the market, with inefficient capacity utilization hindering industrial structure upgrading and resource allocation efficiency. This article examines how capital market liberalization impacts corporate capacity utilization in China. Our findings demonstrate that capital market liberalization provided opportunities to alleviate excess corporate capacity from 2008 to 2022. From the supply side, capital market liberalization could improve capacity utilization by enhancing innovation and investment efficiency. From the demand side, it could reduce excessive capacity by strengthening corporate reputation and promoting products and services. Furthermore, the liberalization effect mitigated Chinese-style overcapacity stemming from monopolies, government intervention, and “wave phenomena,” rather than natural competition. This study highlights the importance of resolving excess capacity in emerging markets.