Investment risk, return gap, and financialization of non-listed non-financial firms in China

This paper constructs a portfolio choice model allowing risks in both fixed and financial investments to capture non-financial firms' financialization behavior. Using firm-level panel data from non-listed non-financial firms in China over the period from 1998 to 2009, we find that relatively risk in fixed investment and rates of return gap between financial and fixed investments play significant roles in financialization behavior for the whole sample firms. Further group-division analysis based on firms' ownership and operating conditions reveal discrepancies between state-owned and private firms and between well-operated and insolvent firms.