Using GMM for endogenous test.

China’s stimulus policies have caused overleveraging and overcapacity for the sustainable development of most industries (particularly high-pollution and energy-intensive industries). Thus, deleveraging and decapacity have become the two best options for the above industries to achieve long-term sustainable development. Based on China’s A-share listed companies from 2009 to 2019, this study investigated the effect of deleveraging and decapacity on corporate capital allocation using fixed effects, propensity score matching (PSM) and difference-in-differences (DID). A homogeneity analysis of geographical and firm characteristics was also conducted. The results show that: (1) Deleveraging and decapacity can significantly increase financial capital allocation by 3.67%, and decapacity can increase investment-related capital allocation by 0.63%. This indicates asset allocation optimization for sustainable development. (2) High asset reversibility can weaken the effect of deleveraging on financial capital allocation while strengthening the effect of decapacity on capital investment. (3) The impact of deleveraging and decapacity may vary among companies due to heterogeneous asset reversibility resulting from geographical locations and technological intensities. Given the current global energy crisis, optimizing capital allocation has become essential in addressing resource shortages and achieving long-term sustainable development. This study may provide a reference for alleviating corporate capital misallocation.