Financialization and sluggish recovery of firms' investment: Global evidence from the 2007–2008 financial crisis

• Published date: 01 December 2023
• Author: Mingjin Luo,Shenqguan Wang
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/infi.12439

Received: 16 June 2022

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Accepted: 20 September 2023

DOI: 10.1111/infi.12439

ORIGINAL ARTICLE

Financialization and sluggish recovery of

firms' investment: Global evidence from the

2007–2008 financial crisis

Mingjin Luo

1

|Shenqguan Wang

2

1

International Development Cooperation

Academy, Shanghai University of

International Business and Economics,

Shanghai, China

2

Institute of Advanced Studies in

Humanities and Social Sciences, Beijing

Normal University, Zhuhai, China

Correspondence

Shenqguan Wang, Institute of Advanced

Studies in Humanities and Social

Sciences, Beijing Normal University,

Zhuhai 519087, China.

Email: wangshq@bnu.edu.cn

Funding information

National Social Science Foundation of

China, Grant/Award Number: 19CJY063;

National Natural Science Foundation of

China, Grant/Award Number: 72003205;

General Project of Social Science

Planning in Guangdong Province,

Grant/Award Number: GD22CYJ12

Abstract

After the financial crisis of 2007–2008, the global

economy witnessed a trend of sluggish investment

recovery and continuous deepening of financialization.

Using data on nonfinancial firms from 108 countries

over the period from 2000 to 2017, we examine the

impact of financialization on firms' postcrisis invest-

ment recovery with a probit model. We find that firms'

financialization inhibited postcrisis investment recov-

ery, and this finding remains stable under a series of

robustness checks. Further discussion shows the

hindering impact of financialization on investment

recovery is especially dominant among firms with

severe financial constraints and firms from advanced

economies. Higher financial market yield also exacer-

bates the restraint effect of financialization on invest-

ment recovery.

KEYWORDS

financial constraints, financial market, financialization,

investment recovery

1|INTRODUCTION

The global financial crisis of 2007–2008 triggered a severe recession, and the economic recovery

after the crisis experienced many unprecedented difficulties. The sluggish postcrisis recovery

was always accompanied by a large portion of output loss and thus implied a lower growth

path. It is well noted that the recovery of investment lags behind the recovery of output growth

(Alexander & Eberly, 2018) and plays a vital role in dragging global output recovery (Chen

International Finance. 2023;26:344–363.wileyonlinelibrary.com/journal/infi344

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© 2023 John Wiley & Sons Ltd.

et al., 2019). Therefore, exploring the dynamics of investment recovery and identifying its

corresponding driving factors are of considerable significance to our understanding of postcrisis

economic recovery, and may cast some lights on enterprises' recovery after the recent pandemic

crisis.

Prior studies have paid particular attention to the roles of macrolevel factors in shaping the

output recovery and recovery of the stock market (Barthélémy et al., 2020; Bijsterbosch &

Dahlhaus, 2015; Calvo et al., 2013; Camarero et al., 2021; Cerra et al., 2013; Mitchener &

Wandschneider, 2015; Reinhart & Rogoff, 2014; Romer & Romer, 2017; Wan & Jin, 2014). In

recent years, research on postcrisis economic recovery has extended to the firm level. Using a

firm‐level data set, scholars have found that financing constraints (Clarke et al., 2012; Jin

et al., 2018; Kannan, 2012; Levine et al., 2016), debt burden (Alfaro & Chen, 2012; Coulibaly &

Millar, 2011), attributes of multinational firms (Lawless et al., 2015) and environmental

practices (Marsat et al., 2021) impact output recovery at the firm level after a crisis.

Nevertheless, few studies have focused on investment recovery after the crisis and its

determinants.

Furthermore, with the in‐depth development of the financialization of the global economy,

especially after the financial crisis, the impacts of financialization on economic development

have attracted the attention of many scholars. Contrary to the classical theories of McKinnon

(1973) and Shaw (1973), some recent studies have pointed out that the recent deepening of

financialization has adverse effects on economic development (Arcand et al., 2015; Beck

et al., 2014; Cecchetti & Kharroubi, 2012; Huang et al., 2022; Law & Singh, 2014), or has a

threshold effect on growth (Altuzarra et al., 2022).

What should be mentioned is that recent financialization is typically connected with the

participation of nonfinancial firms in financial markets. Specifically, nonfinancial firms have

increased financial expenditure to meet the demands of shareholders for maximizing their

interests and firms conduct more financial market investment activities (Bonizzi, 2013;

Davis, 2018; Tori & Onaran, 2020). In the context of sluggish investment recovery and booming

firms' financialization in the postcrisis era, we may ask what the role of firms' financialization

is in postcrisis investment recovery. To our knowledge, no study has addressed this issue thus

far. We propose to fill the research gap on the relationship between a firm's financialization and

investment recovery in the specific context of the financial crisis. From the macro perspective,

we plot the landscape of financial developments of economies in Figure 1around the financial

crisis. According to previous studies (Bae et al., 2021; Rajan & Zingales, 1998), three indicators

are employed to measure the financial development of economies: the financial intermediation

ratio measured by the portion of a country's private sector credit to GDP, market capitalization

ratio measured by market capitalization of listed domestic companies to GDP, and the

monetization ratio measured by the volume of M2 to GDP. It could be observed that after the

financial crisis, financial markets overall maintain steady development, with a slight upward

trend comparing the precrisis averaged level, which is reflected in both advanced and emerging

and developing economies. But there is an exception, which is that the proportion of private

credit in emerging and developing economies has shown a downward trend after the financial

crisis, which is mainly affected by the relatively slow recovery of the emerging and developing

in the postcrisis era. After the financial crisis, investment opportunities in the real sector overall

shrink and the risks of investing in the real sector increased. The continuous financial

development and the reduction of real investment opportunities may promote the expansion of

nonfinancial firms' financialization.

LUO and WANG

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