Feed-back effect or crowding-out effect: The influence of financialization on the main business performance of real enterprises

Facing the current trend of the virtualization of the real economy, this paper examines the influence of financialization on the main business performance of real enterprises. Theoretically, corporate financialization often stems from the motives of “reservoir” and “speculative arbitrage”, which in turn lead to the “feed-back effect” or the “crowding-out effect. Collecting data from China's A-share listed companies from 2012 to 2022, this study constructs a micro-level indicator of corporate financialization and empirically tests the effects and mechanisms of financialization on their main business performance. The findings reveal that, overall, financialization has a detrimental impact on their main business performance, indicating that the “crowding-out effect” outweighs the “feed-back effect”. This conclusion remains robust after a series of robustness tests. Further mechanistic tests demonstrate that financialization does not act as a “reservoir” to reserve liquidity funds; rather, it inhibits corporate innovation investments and real capital investments, thereby diminishing the main business performance of real enterprises. This research, from the micro-level perspective, proves the influence of financialization on the development of real enterprises to be negative. It also offers empirical support for government to strengthen financial regulation of real enterprises and guide capital to “return from virtual to real”.