Does Financialization of Non-Financial Corporations Promote or Prohibit Corporate Risk-Taking?

Abstract

ABSTRACT We investigate how the financialization of nonfinancial corporations (NFCs) affects corporate risk-taking. We find that NFCs’ financialization has an adverse effect on corporate risk-taking, supporting the “crowding-out” effect. Short-term financial investments undermine firms’ incentives to chase risky but profitable investment projects. The negative association between NFCs’ financialization and corporate risk-taking is more pronounced in state-owned enterprises and firms with lower institutional ownership, showing that financialization leads managers to become more myopic and reduce long-term investments. Further, the sensitivity of financialization and corporate risk-taking varies with financial asset classification. We address both selection and endogeneity concerns.