The impact of excessive financial investment on corporate risk

Abstract

This study examines the rising trend of financialization among Chinese non-financial corporations, emphasizing its implications for the real economy and sustainable development. Using data from publicly listed companies on China's A-share market from 2009 to 2023, the research investigates how excessive financial investment behaviors affect corporate risk. The study conducts an extensive empirical analysis using data from the Chinese A-share market. It employs fixed-effects models and instrumental variable methods to establish a causal relationship between financial investment activities and corporate risk. The results demonstrate that excessive financial investment significantly increases corporate risk. Specifically, investments in trading financial assets and real estate primarily drive this heightened risk. Such investments divert corporate attention from core activities by reducing research and development expenditures and creating financial mismatches. However, effective corporate governance can partially offset these negative impacts of financialization. This study contributes uniquely to existing literature on financial investments by non-financial firms. It goes beyond traditional metrics such as total investment scale or profit share, instead distinguishing between moderate and excessive financial investments. Furthermore, this study specifies the role of corporate governance as a critical boundary condition, which provides new evidence for understanding the relationship between financialization and the stability of the real economy and offers significant insights for corporate risk management and relevant policy-making.