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The financial investment decision of non-financial firms in China

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  • Zhang, Chengsi
  • Zheng, Ning

Abstract

This paper constructs a portfolio model to analyze the determinants of the financial investment decision of non-financial firms in China. Unlike the literature assuming that financial investments are riskless, our model allows risks in both fixed and financial investments. We show that this extension provides an analytically similar but economically different model from the literature. In particular, it is relative risk and risk-adjusted return gap, not pure risk and simple return gap that enter into firms’ financial investment decision model. Using firm-level panel data of 1902 firms listed in Chinese stock market over the period from 2006 to 2016 with semi-annual frequency, we find that the ratio of fixed investment risk over total risk dominates financial investment decisions of non-financial firms. However, rates of risk-adjusted return gap between financial and fixed investments play no role in Chinese firms’ financial investment decisions, which is in stark contrast to the results using a model assuming riskless financial investments. The baseline findings are robust to alternative measures of financialization and investment risk and different firm sizes, ownership structures and time periods.

Suggested Citation

  • Zhang, Chengsi & Zheng, Ning, 2020. "The financial investment decision of non-financial firms in China," The North American Journal of Economics and Finance, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:ecofin:v:53:y:2020:i:c:s1062940820301121
    DOI: 10.1016/j.najef.2020.101215
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    More about this item

    Keywords

    Financial investment; Portfolio choice; Investment risk; Return gap; Financialization;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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