Economic environment uncertainty and financialization of real estate firms

Abstract

This paper investigates the impact of economic environment uncertainty on real estate firms' financialization and explores the underlying mechanisms. This paper utilizes data from listed real estate firms from 2011 to 2021, focusing on the rationale for firms' financialization. In contrast to prior literature, this study employs the macro-level economic uncertainty index and the micro-level uncertainty perception measures to gauge economic environment uncertainty. The findings indicate that an increase in economic environment uncertainty leads to a greater inclination of firms to engage in financialization, driven by the "precautionary savings" motivation. Furthermore, this effect is primarily driven by the firm-level perception of uncertainty in the external environment. Mechanisms tests demonstrate that when there is uncertainty in the economic environment, corporations are more likely to engage in financialization, primarily due to decreased CEO overconfidence and reduced corporate risk-taking. Moreover, the level of financing constraints and executives with financial expertise contribute to the heterogeneous effects of uncertain economic conditions on real estate firms' financialization. Firms with high financing constraints and financial background executives are more likely to engage in and enlarge investments in financial assets, while firms without financial background executives are not. Furthermore, there is no notable correlation between the level of financialization of state-owned enterprises and policy fluctuations in the economic environment. The findings provide valuable insights for businesses to explore alternative paths for growth, raising awareness among government regulators about the risks associated with financialization.