How can China's sustainable development be damaged in consequence of financial misallocation? Analysis from the perspective of regional innovation capability

China's extensive economic growth has been accompanied with high levels of pollution, and excessive energy consumption has brought serious pollution problems. The use of financial resources to regulate green production modes and encourage high-quality economic development has become a major focus in academia. At the same time, growth enterprise market (GEM) enterprises, which mainly operate in technology-intensive industries, are assumed to have a simulating effect on regional innovation. Therefore, this paper utilizes the capital return differences of 4437 listed companies and 920 GEM companies based in 30 provinces of China from 2008 to 2018 to quantitatively analyze the levels of financial misallocation. With two-stage regression method, the direct effect of financial misallocation on regional green total factor energy efficiency (GTFEE) and the indirect impact observed when taking regional innovation as an intermediary variable are discussed. Furthermore, dynamic threshold panel regression and heterogeneity analysis are used to verify the above nonlinear relationship. The empirical findings indicate that financial misallocation enhances innovation capability and further restrains GTFEE. With an improved degree of marketization and environmental regulation, the inhibitory effect of financial misallocation on GTFEE is more significant.