Firm-level financialization: Contributing factors, sources, and economic consequences

Using the ratio of risky financial assets to total assets to proxy for financialization, we examine the contributing factors, sources, and economic consequences of firm-level financialization in a sample of Chinese firms from 1998 to 2019. Our findings suggest that: 1) there is an increasing trend of firm-level financialization, 2) The increase in financialization is driven by an increase in a firm's increase in financial assets, 3) occasional cash flows, such as sales of assets, together with operating cash flows and cash flows from debt and equity are the sources of funding for financialization, and 4) the effect of financialization on a firm's performance, while negative, exhibits a U-shape non-linear effect. We show that financialization is a long-term trend, and it has a generally negative effect on firm performance.

Automated summary

This study examines the factors, sources, and economic consequences of firm-level financialization in Chinese firms from 1998 to 2019, using the ratio of risky financial assets to total assets as a proxy. The findings suggest an increasing trend of firm-level financialization, driven by the increase in financial assets. Occasional cash flows, such as sales of assets, along with operating cash flows and cash flows from debt and equity, serve as the sources of funding for financialization. The effect of financialization on firm performance is negative and exhibits a U-shaped non-linear effect.