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The effects of financialisation and financial development on investment: evidence from firm-level data in Europe

The effects of financialisation and financial development on investment: evidence from firm-level data in Europe

Tori, Daniele and Onaran, Özlem ORCID: 0000-0002-6345-9922 (2017) The effects of financialisation and financial development on investment: evidence from firm-level data in Europe. [Working Paper]

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Abstract

In this paper we estimate the effects of financialization on physical investment in selected western European countries using panel data based on the balance-sheets of publicly listed non-financial companies (NFCs) supplied by Worldscope for the period 1995-2015. We find robust evidence of an adverse effect of both financial payments (interests and dividends) and financial incomes on investment in fixed assets by the NFCs. This finding is robust for both the pool of all Western European firms and single country estimations. The negative impacts of financial incomes are non-linear with respect to the companies’ size: financial incomes crowd-out investment in large companies, and have a positive effect on the investment of only small, relatively more credit-constrained companies. Moreover, we find that a higher degree of financial development is associated with a stronger negative effect of financial incomes on companies’ investment. This finding challenges the common wisdom on ‘finance-growth nexus’. Our findings support the ‘financialization thesis’ that the increasing orientation of the non-financial sector towards financial activities is ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term stagnation in productivity.

Item Type: Working Paper
Uncontrolled Keywords: Financialization; investment; non-financial sector; firm data; Europe; financial development;
Subjects: H Social Sciences > HG Finance
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Department of International Business & Economics
Faculty of Business > Greenwich Political Economy Research Centre (GPERC)
Last Modified: 08 Feb 2017 10:26
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
URI: http://gala.gre.ac.uk/id/eprint/16089

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