Nonlinear Effect of Financialization on Firm Productivity

This study investigates whether firms gain from financialization activities by introducing a novel institution-specific proxy: manual interest rate adjustment (MIRA). MIRA captures banks’ implicit strategic overpayment on corporate demand deposits within China’s financial system. Using panel data of Chinese listed non-financial firms from 2000 to 2023 and various machine learning algorithms to estimate the unobservable MIRA, we select tree-based ensemble methods due to their superior out-of-sample predictive performance. Our findings reveal a nonlinear relationship between financialization and firm productivity. Moderate levels of MIRA-induced financialization enhance productivity, whereas excessive reliance on deposit-based interest income distorts investment incentives, crowds out productive investment, and reduces operational efficiency. Heterogeneity analysis indicates that non-state-owned enterprises (NSOEs) and firms in underdeveloped regions experience stronger positive effects at moderate levels, yet are also more vulnerable to negative consequences when financialization becomes excessive. By uncovering a distinct China-specific financing phenomenon, our results reconcile existing disputes in the literature regarding the impact of financialization on firms. Furthermore, this study highlights how bank competition and institutional arrangements within the Chinese financial system shape firms’ real economic behavior.