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

Tiecheng Leng, Ying Liu, Yi Xiao and Chunxiao Hou

Pacific-Basin Finance Journal, 2023, vol. 79, issue C

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.

Keywords: Corporate financialization; Corporate investment; Corporate governance (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:79:y:2023:i:c:s0927538x23000367

DOI: 10.1016/j.pacfin.2023.101970

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