The Financial Hangover: Financialization and Productive Investment of Non-Financial Firms after the Global Financial Crisis

• In Event: 50267 - Finance and Labor

Abstract

The present study examines the impact of the global financial crisis on the relationship between financialization and productive investment of non-financial firms. We argue for the lingering, negative impact of financialization through risk exposure; non-financial firms’ pre-crisis involvement in financial activities, by exposing them to financial turmoil during the crisis, continues to depress their productive investment after the crisis. To test our argument, we focus on the effect of financial diversification, which is a more direct measure of the financialization of non-financial firms than conventional measures. Using propensity-score-weighted samples of non-financial firms in the United States that had financial divisions before the crisis and their control cases, we compare their productive investment, including employment, investment in fixed assets, and R&D expenditures, as well as their financial performance, from 2007 and 2019. The results show that firms with financial divisions lagged behind their control cases for productive investment, especially employment, as well as financial performance, after the crisis. Fixed effects analysis using data on all publicly traded firms shows similar results. By demonstrating the increased vulnerability of non-financial firms to the volatility of financial markets, our study reveals a less understood risk of downside financialization.

Authors

• Jiwook Jung, University of Illinois at Urbana-Champaign

• Chien-Hao Chen, University of Illinois at Urbana-Champaign