The nexus between trade policy uncertainty and corporate financialization: Evidence from China

Though previous studies have suggested that policy-related uncertainty is a key factor that influences corporate financialization, it is far clear how trade policy uncertainty (TPU) impacts it. Using a large sample of Chinese listed non-financial enterprises (NFEs) over the period of 2007-2020, we develop a model by introducing the cross-sectional difference in firm-specific TPU exposure to explore the nexus between TPU and corporate financialization. We find that TPU is positively associated with corporate financialization. Increased TPU raises corporate financialization by affecting cash holdings, firm value, and return gap between real and financial investments. Our results are robust to using alternative measures of TPU exposure and corporate financialization, controlling for other policy uncertainties, and instrumental variable estimation. Our findings suggest that TPU is detrimental to the high-quality development of the real economy, and meanwhile hampers financial stability.