The Development of Digital Finance and Firms’ Transformation from Virtual to Real

Abstract

Firms’ transformation from virtual to real means that firms allocate more capital from non-productive areas to productive areas, which is shown as the decrease of the level of firm financialization. The inefficient supply of traditional financial services is one of the factors that promotes firm financialization. In recent years, with the development and popularization of new technology, digital finance emerges at the historic moment. In essence, digital finance utilizes network technologies such as artificial intelligence, big data, cloud computing, Internet of Things, and blockchain to not only expand the accessibility of financial services, but also solve the problems of high risk premium and high operating cost generated in traditional financial services. Therefore, in view of the development scale of China’s internet economy and its leading position in the world’s technical practice, and considering the huge effect of digital finance on traditional financial services, it is necessary to explore the effect mechanism of digital finance on firm financialization from the perspective of Fintech progress.Based on the annual data of A-share listed firms in Shanghai and Shenzhen stock exchanges from 2011 to 2018, this paper examines the effect of digital finance development on firm financialization. The empirical study finds that the development of digital finance can reduce the level of firm financialization. The mechanism test finds that digital finance inhibits firm financialization mainly by weakening the precautionary motivation of firms. Further study finds that the inhibition of digital finance development on firm financialization only exists in the weak samples of the structural mismatch of traditional finance. In other words, the inhibitory effect of digital finance on firm financialization is more significant in private firms, manufacturing firms and growth-stage firms. Meanwhile, compared with short-term financial assets, long-term financial assets of firms are more significantly inhibited by the development of digital finance. With the standardization of the regulatory environment and the strengthening of supervision, the development of digital finance has a more significant inhibiting effect on firm financialization.The research contributions of this paper are mainly reflected in the following three aspects: Firstly, from the perspective of digital finance, it reveals the effect mechanism of Fintech progress on firm financialization, and clarifies the important role of Fintech progress in the interaction between real economy and virtual economy. Secondly, from the perspective of firm financialization, it empirically investigates the microeconomic consequences of digital finance, and supplements related literatures on the economic consequences of digital finance. Thirdly, the findings of this paper are conducive to understanding the positive role of digital finance in correcting financial mismatch. In terms of policy suggestions, on the one hand, for firms, digital finance can effectively alleviate the financial pressure and financing constraints. Especially for manufacturing firms, start-ups and private firms, digital finance can play a role of inclusive finance. On the other hand, for regulators, it is necessary to effectively regulate digital firms and the digital economy to avoid risks such as industry monopoly, data security and regulatory loopholes.