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Monetary policy and financial investments of nonfinancial firms: New evidence from China

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  • Zhang, Chengsi
  • Zheng, Ning

Abstract

This paper develops a portfolio choice model by incorporating monetary policy and analyzes the determinants of financial investments of nonfinancial firms in China. Unlike the literature assuming financial investments are riskless, we allow risks in both financial and real investments in firms' portfolio choice model. Our theoretical framework suggests that monetary policy, relative risk in fixed investment, and the risk-adjusted return gap between financial and fixed investments are determinants of firms' financial investments. Using firm-level panel data over the period from 2006 to 2016, we find that the relative risk in fixed investment and quantitative expansionary monetary policy have led to rising financial investments of nonfinancial firms in China over the post-2008 financial crisis period, whereas the rate of the risk-adjusted return gap between financial and fixed investments plays no role in firms' financial investments. The impact of monetary policy on firms' financial investments is also interlinked with their ownerships, with distinct impacts emerging between state-owned and non-state-owned firms.

Suggested Citation

  • Zhang, Chengsi & Zheng, Ning, 2020. "Monetary policy and financial investments of nonfinancial firms: New evidence from China," China Economic Review, Elsevier, vol. 60(C).
    • Handle: RePEc:eee:chieco:v:60:y:2020:i:c:s1043951x20300171
    DOI: 10.1016/j.chieco.2020.101420
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    3. Duan, Yuejiao & Goodell, John W. & Li, Haoran & Li, Xinming, 2022. "Assessing machine learning for forecasting economic risk: Evidence from an expanded Chinese financial information set," Finance Research Letters, Elsevier, vol. 46(PA).
    4. Yang, Baochen & Chen, Fengrui, 2023. "The financialization of nonfinancial companies in China: A macroeconomic perspective," Finance Research Letters, Elsevier, vol. 53(C).
    5. Tian, Guangning & Li, Bo & Cheng, Yue, 2022. "Bank competition and corporate financial asset holdings," International Review of Financial Analysis, Elsevier, vol. 84(C).
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    8. Yuanlin Wu & Cunzhi Tian & Guannan Wang, 2023. "Local Government Debt and Corporate Investment Behavior in China: Real versus Financial Investment," Sustainability, MDPI, vol. 15(22), pages 1-22, November.

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    More about this item

    Keywords

    Monetary policy; Financial investments; Portfolio choice; Nonfinancial firms;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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