The Effects of Financialisation and Financial Development on Investment: Evidence from Firm-Level Data in Europe

Tori, D., Onaran, O. (2017). The effects of financialisation and financial development on investment:Evidence from firm-level data in Europe.

65 Pages Posted: 4 Nov 2017 Last revised: 6 Nov 2017

Date Written: November 2, 2017

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’. Overall, 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.

Keywords: Financialisation, Investment, Non-financial sector, Firm data, Europe, Financial development

JEL Classification: C23, D22, G31

Suggested Citation

Tori, Daniele and Onaran, Ozlem, The Effects of Financialisation and Financial Development on Investment: Evidence from Firm-Level Data in Europe (November 2, 2017). Tori, D., Onaran, O. (2017). The effects of financialisation and financial development on investment:Evidence from firm-level data in Europe. , Available at SSRN: https://ssrn.com/abstract=3064062 or http://dx.doi.org/10.2139/ssrn.3064062

Daniele Tori (Contact Author)

The Open University ( email )

Walton Hall
Milton Keynes, Buckinghamshire MK7 6AA
United Kingdom

Ozlem Onaran

Independent ( email )

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