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

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.