Abstract: From the perspective of market microstructure theory, this paper investigates the relationship between stock liquidity, business investment and capital allocation efficiency of China’s listed companies. The findings show that stock liquidity is conductive to the increase of business investment. Further study finds that compared to the enterprises with lower degree of financing constraints, mature state or fewer operation risks, the function of stock liquidity helping to increase business investment is more significant in the enterprises with higher degree of financing constraints, growing state or higher operation risks. In addition, to explore the economic results of liquidity from the perspective of capital allocation efficiency, it is found that liquidity can help to restrain the overinvestment behaviors and alleviate underinvestment behaviors of the listed companies, thus improving the capital allocation efficiency. The results of this study indicate that only by further optimizing the ownership structure and corporate governance, standardizing the information disclosure system and strengthening the fighting against inside trading, can the stock liquidity be enhanced and the capital allocation efficiency be optimized.

Key words: stock liquidity; business investment; capital allocation efficiency; market microstructure