Monetary policy and financial investments of nonfinancial firms: New evidence from China

Chengsi Zhang and Ning Zheng

China Economic Review, 2020, vol. 60, issue C

Abstract: This paper develops a portfolio choice model by incorporating monetary policy and analyzes the determinants of financial investments of nonfinancial firms in China. Unlike the literature assuming financial investments are riskless, we allow risks in both financial and real investments in firms' portfolio choice model. Our theoretical framework suggests that monetary policy, relative risk in fixed investment, and the risk-adjusted return gap between financial and fixed investments are determinants of firms' financial investments. Using firm-level panel data over the period from 2006 to 2016, we find that the relative risk in fixed investment and quantitative expansionary monetary policy have led to rising financial investments of nonfinancial firms in China over the post-2008 financial crisis period, whereas the rate of the risk-adjusted return gap between financial and fixed investments plays no role in firms' financial investments. The impact of monetary policy on firms' financial investments is also interlinked with their ownerships, with distinct impacts emerging between state-owned and non-state-owned firms.

Keywords: Monetary policy; Financial investments; Portfolio choice; Nonfinancial firms (search for similar items in EconPapers)
JEL-codes: E22 E58 G11 O16 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:chieco:v:60:y:2020:i:c:s1043951x20300171

DOI: 10.1016/j.chieco.2020.101420

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