Total Factor Productivity (TFP) and Financial Markets

Min Bai, Dong Zhang and Jiaoying Yang
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Min Bai: University of Waikato, Hamilton, New Zealand
Dong Zhang: Zhengzhou University, Henan, China
Jiaoying Yang: Zhengzhou University, Henan, China

American Business Review, 2025, vol. 28, issue 1, 176-202

Abstract: The dynamic interplay between real firms and the financial markets remains under continuous government scrutiny, reflecting the evolving diversity that accompanies the expansion of financial markets. Given the financial market's critical role in capital provision, it is essential to understand how different funding relationships influence firm performance. This study focuses on A-share listed companies in China from 2013 to 2023, categorizing their funding relationships into two distinct types: net investment and net financing. The analysis reveals a significant dampening effect on Total Factor Productivity (TFP) associated with net investment-based funding relationships. Mechanistic investigations indicate that this suppression is due to the diversion of capital from core business activities towards net investment activities, ultimately hindering productivity. These findings offer valuable insights into the complex relationship between real firms and the financial markets, highlighting the varied mechanisms through which the financial markets can either enhance or impede firm value. Additionally, the study provides practical policy recommendations for regulatory authorities aimed at optimizing the real economy's access to financial services by refining the funding relationships between real firms and the financial markets.

Keywords: Financial Markets; Net-Investment Type; Net-Financing Type; TFP (search for similar items in EconPapers)
JEL-codes: D24 D25 E22 G10 (search for similar items in EconPapers)
Date: 2025
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