| Abstract | Chinese mechanism of loan prime rate concentrated quotation and release was officially launched in 2013. Through this exogenous event, this paper used the data of Shanghai and Shenzhen A-share listed companies from 2009 to 2016, as well as the "Difference-in-Differences Estimator", to test whether and how the interest rate liberalization affect firms’ investment decisions and investment efficiency. In this paper, we found that after the formal operation of "Chinese mechanism of loan prime rate concentrated quotation and release", those firms, whose loans were from the first nine quotations firms, reduced their investments and excessive bank borrowings significantly, leading to less over-investment. However, soft budget constraints were an important condition for the micro-effect of interest rate liberalization because such results mentioned above only existed in non-state-owned enterprises. Our further tests in the non-state-owned enterprises shown that, those firms, which had no bank connections or no political connections, reduced their investments after the interest rate marketization reform, leading to less over-investment. When having better investment opportunities, the sensitivity between investments and investment opportunities of non-state enterprises was increased significantly after the interest rate marketization reform. It meant that only if enterprises were not subject to soft budget constraints can interest rate liberalization make firms invest rationally, reduce their over-investments and improve their investment efficiency. Based on the empirical evidence of the investments of the listed companies after the financial crisis in 2008, it shows that only through hardening the budget constraints can interest rate marketization adapt to the new economic normal, as well as play the role to transform the economic development pattern and to improve the efficiency of resource allocation. |