Does Corporate Financialization Have a Non-Linear Impact on Sustainable Total Factor Productivity? Perspectives of Cash Holdings and Technical Innovation

Abstract

This study explores the conditions under which financialization may foster sustainable total factor productivity (TFP). We examine the inverted U-shaped relationship between corporate financialization and TFP by employing a panel threshold model using microeconomic non-financial panel data from Chinese firms in the 2007 to 2018 period. Our results suggest that the turning point is more significant in holding short-term financial assets and state-owned enterprises. The threshold effect suggests that technical innovation determines the optimal threshold at which TFP is affected by financialization. Further, financialization is considered an alternative to cash in order to increase the value of capital, leading to a positive effect on TFP. Contrary to their positive effects below the optimal thresholds, financialization exceeds a certain level, displaces technical innovation, and becomes detrimental to TFP. Our analysis thus establishes the importance of sustainable growth of TFP and minimize the adverse effect of financialization.