Does Financialization of Non-Financial Corporations Promote or Prohibit Corporate Risk-Taking?

Jinghua Wang and Ning Mao

Emerging Markets Finance and Trade, 2022, vol. 58, issue 7, 1913-1924

Abstract: We investigate how the financialization of nonfinancial corporations (NFCs) affects corporate risk-taking. We find that NFCs’ financialization has an adverse effect on corporate risk-taking, supporting the “crowding-out” effect. Short-term financial investments undermine firms’ incentives to chase risky but profitable investment projects. The negative association between NFCs’ financialization and corporate risk-taking is more pronounced in state-owned enterprises and firms with lower institutional ownership, showing that financialization leads managers to become more myopic and reduce long-term investments. Further, the sensitivity of financialization and corporate risk-taking varies with financial asset classification. We address both selection and endogeneity concerns.

Date: 2022
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DOI: 10.1080/1540496X.2021.1944853

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