Industry-finance integration and corporate financialization: The side effects from the industry-finance integration pilot cities

Industry-finance integration is essential to address the separation between the financial sector and the real economy. Its positive value in enhancing the effectiveness of financial services in supporting economic development has been widely verified. However, the negative effects are rarely discussed. Using the “Construction of National Industry-finance Integration Pilot Cities” as the quasi-experiment and the data of Chinese A-share listed firms in manufacturing industries from 2013 to 2023, we test the impacts of industry-finance integration on corporate financialization. The conclusion shows that industry-finance integration significantly promotes corporate financialization. The effects are more evident among non-SOEs, firms in high-tech industries, and firms with fewer institutional investors. Furthermore, the effects can be amplified in the regions with stronger policy implementation and stricter financial regulations, as well as during the later batches of the pilot and the exogenous shock of the COVID-19 pandemic. As for the discussion of the plausible channels, we find that while industry-finance integration can alleviate the firms’ financial constraints, the lack of adequate investment opportunities and the lower returns of physical investment drive the firms to invest more in financial assets. Besides that, the industry-finance integration pilot increases firms’ risks, makes firms act as shadow banks and fosters their myopia, thereby enhancing their financialization. This study provides insights for mitigating the side effects of industry-finance integration and ensuring that financial resources truly flow into the real economy.