Abstract: Based on Aoki’s (2012) theoretical accounting framework, this paper measures and calculates the capital and labor mismatch coefficients at China’s provincial and industrial levels, employs the two-way fixed effect model to check the relationships between China’s provincial level and industrial level and between the financial development and capital mismatch respectively, and uses the two-step differential GMM and the system GMM to test the robustness. The results show that there is an“inverted U-type”relationship between the provincial level and the industrial level and between the financial development and the capital mismatch. When the financial development is at a lower level, the acceleration of capital accumulation will lead to an increase in capital mismatch, but when financial development reaches a higher level, this effect will be reversed; industries with high external financing dependence or high investment intensity will be benefited most from the financial development, while the industries with higher R&D intensity can potentially reduce the degree of capital mismatch, but its effect is not statistically significant. Therefore, the government should control the scale of bank credit and coordinate the levels of financial development in each region. It should encourage and support the industries with higher external financing dependence and investment intensity through bank credit and market-guided capital allocation to improve the capital allocation of the industry.

Key words: financial development; capital mismatch; “inverted U-shaped” relationship; two-way fixed effect model; generalized method moment