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Does firm financialization affect optimal real investment decisions? Evidence from China

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  • Leng, Tiecheng
  • Liu, Ying
  • Xiao, Yi
  • Hou, Chunxiao

Abstract

Whether and how financialization could crowd out real investments, and the resulting “from real to virtual” phenomenon has great economic implications. This study examines the effect of firm-level financialization on real corporate investments, using a sample of non-financial firms in China. We find a negative association between firm financialization and optimal real investments, indicating that financial market speculations depress long-term real investments. Further, the dampening effect is more pronounced for firms with weaker board monitoring, with less financially-sophisticated managers, suggesting that the investment distortion caused by financialization can be partially alleviated by strong corporate governance and managers’ financial expertise.

Suggested Citation

  • Leng, Tiecheng & Liu, Ying & Xiao, Yi & Hou, Chunxiao, 2023. "Does firm financialization affect optimal real investment decisions? Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:pacfin:v:79:y:2023:i:c:s0927538x23000367
    DOI: 10.1016/j.pacfin.2023.101970
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