| Abstract | Existing finance theories suggest that the risk of business financing constraints is closely related to market incompleteness and has the characteristic of undiversibility. The greater the business financing constraints, the higher the idiosyncratic risk, the more technological innovation output there will be, with stock investors gaining more abnormal returns. What is more, the risk of financing constraints can give an explanation to the scale effect. However, our study on Chinese listed companies has found that although the risk of business financing constraints has a significant positive correlation with the abnormal stock returns, it has a significant positive correlation with neither idiosyncratic risk nor technological innovation output. Another finding is, in our case, the risk of financing constraints cannot explain the scale effect. Considering these characteristic phenomena are significantly different from what the existing literature says, we present “the puzzle of financial constraints in China” and try to explain it. In this paper, the exploratory empirical study shows that the risk of financing constraints facing Chinese businesses is probably due in large part to imperfect market competition caused by government intervention, rather than market friction and liquidity constraints, which cancels out the incentive effect of financing constraints risk on technological innovation and gives rise to the suppressing effect. |