Financialization, financial development and investment. Evidence from European non-financial corporations

This article provides estimations of the effects of different financial channels on physical investment in Europe using the balance sheets of publicly listed non-financial corporations (NFCs) for the period 1995-2015. The evidence suggests that both financial payments and financial income have an adverse effect on investment in fixed assets. The negative impacts of increasing financial income are non-linear with respect to company size: they crowd out investment in large companies, and have a positive effect on the investment of relatively smaller companies. Similar to the recent literature on finance-growth nexus, we find an inverted U-shaped relationship between financial development and companies' investment. However, in contrast to the existing literature, we also find that a higher degree of financial development in the country is associated with a stronger negative effect of financial income on investment.