U-shaped relationship between managerial herd behavior and corporate financialization with the moderating effect of corporate governance: evidence from China
Abstract
Based on behavioral finance theory, we discuss the influence of managers’ herd behavior on corporate financialization from the perspective of managers’ behavioral preferences. Empirical testing was conducted using data from nonfinancial listed firms on the Shanghai and Shenzhen A-shares from 2007 to 2021 and a U-shaped relationship was found between managerial herd behavior and corporate financialization. When managerial herd behavior is within an appropriate range, the increase in managerial herd behavior has a negative influence on corporate financialization. In contrast, excessive managerial herd behavior leads to excessive corporate financialization. Additionally, corporate governance has a weakening effect on this relationship. Heterogeneity analyses indicate significant disparities in the effect of managerial herd behavior on corporate financialization among enterprises with diverse ownership structures. Finally, corporate financialization and innovation investments have an inverted U-shaped relationship, and their relationship is moderated positively by management herd behavior. Our results have strong practical significance for fostering the balanced growth of the financial sector and the real economy.
First published online 05 January 2024
Keyword : managerial herd behavior, information learning motivation, self-interest motivation, corporate financialization, internal corporate governance level, ownership structure, innovative investments
How to Cite
Wang, F., Hu, W., Liu, L., & Yang, L. (2023). U-shaped relationship between managerial herd behavior and corporate financialization with the moderating effect of corporate governance: evidence from China. Journal of Business Economics and Management, 24(5), 939–959. https://doi.org/10.3846/jbem.2023.20660
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Cote, J., & Goodstein, J. (1999). A breed apart? Security analysts and herding behavior. Journal of Business Ethics, 18(3), 305–314. https://doi.org/10.1023/A:1005889208165
Davis, L. E. (2018). Financialization and the non-financial corporation: An investigation of firm-level investment behavior in the United States. Metroeconomica, 69(1), 270–307. https://doi.org/10.1111/meca.12179
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Gehringer, A. (2013). Growth, productivity and capital accumulation: The effects of financial liberalization in the case of European integration. International Review of Economics & Finance, 25, 291–309. https://doi.org/10.1016/j.iref.2012.07.015
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Hong, H., Kubik, J. D., & Solomon, A. (2000). Security analysts’ career concerns and herding of earnings forecasts. The RAND Journal of Economics, 31(1), 121–144.
Hu, Y. M., Wang, X. T., & Zhang, J. (2017). The motivation for financial asset allocation: Reservoir or substitution? – evidence from Chinese listed companies. Economic Research Journal, 52(1), 181–194.
Jian, M., & Lee, K. W. (2011). Does CEO reputation matter for capital investments? Journal of Corporate Finance, 17(4), 929–946. https://doi.org/10.1016/j.jcorpfin.2011.04.004
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Jin, X. M., Mai, Y., & Cheung, A. W. K. (2022). Corporate financialization and fixed investment rate: Evidence from China. Finance Research Letters, 48, Article 102898. https://doi.org/10.1016/j.frl.2022.102898
Kameda, T., & Nakanishi, D. (2003). Does social/cultural learning increase human adaptability?: Rogers’s question revisited. Evolution and Human Behavior, 24(4), 242–260. https://doi.org/10.1016/S1090-5138(03)00015-1
Knyazeva, A., Knyazeva, D., Morck, R., & Yeung, B. Y. (2008). Comovement in investment (Simon School Working Paper). https://doi.org/10.2139/ssrn.1017323
Kornelakis, A., & Gospel, H. (2018). CEO pay and corporate financialization. In The Routledge companion to reward management (pp. 298–308). Routledge. https://doi.org/10.4324/9781315231709-31
Krippner, G. R. (2005). The financialization of the American economy. Socio-Economic Review, 3(2), 173–208. https://doi.org/10.1093/SER/mwi008
Lazonick, W. (2013). The financialization of the U.S. corporation: What has been lost, and how it can be regained. Seattle University Law Review, 36(2), 857–910.
Lei, L., Zheng, D., & Chen, X. (2022). Corporate social responsibility and corporate financialization – Based on information effect and reputation insurance effect. PloS ONE, 17(7), Article e0271552. https://doi.org/10.1371/journal.pone.0271552
Li, Q. M., & Liang, Q. X. (2020). How does “Transforming the economy from substantial to fictitious” spread? Based on the perspective of peer effects. Journal of Finance and Economics, 46(8), 140–155. https://doi.org/10.16538/j.cnki.jfe.2020.08.010
Li, Z., & Wang, Y. (2021). Is there a moderate range of impact of financialization on corporate R&D? PloS ONE, 16(6), Article e0253380. https://doi.org/10.1371/journal.pone.0253380
Lieberman, M. B., & Asaba, S. (2006). Why do firms imitate each other? Academy of Management Review, 31(2), 366–385. https://doi.org/10.5465/amr.2006.20208686
Narayanan, M. P. (1985). Managerial incentives for short-term results. The Journal of Finance, 40(5), 1469–1484. https://doi.org/10.1111/j.1540-6261.1985.tb02395.x
Prendergast, C., & Stole, L. (1996). Impetuous youngsters and jaded old-timers: Acquiring a reputation for learning. Journal of Political Economy, 104(6), 1105–1134. http://www.jstor.org/stable/2138935
Roider, A., & Voskort, A. (2016). Reputational herding in financial markets: A laboratory experiment. Journal of Behavioral Finance, 17(3), 244–266. https://doi.org/10.1080/15427560.2016.1203322
Scharfstein, D. S., & Stein, J. C. (1990). Herd behavior and investment. The American Economic Review, 80(3), 465–479. http://www.jstor.org/stable/2006678
Seo, H. J., Kim, H. S., & Kim, Y. C. (2012). Financialization and the slowdown in Korean firms’ R&D investment. Asian Economic Papers, 11(3), 35–49. https://doi.org/10.1162/ASEP_a_00160
Shi, X., Bu, D., Wen, C., & Lan, Z. (2021). Financial background of controlling shareholder and corporate financialization. China Journal of Accounting Studies, 9(3), 383–407. https://doi.org/10.1080/21697213.2021.2009177
Shin, H. S., & Zhao, L. (2013). Firms as surrogate intermediaries: Evidence from emerging economies. Asian Development Bank.
Shu, J., Zhang, C., & Zheng, N. (2020). Financialization and sluggish fixed investment in Chinese real sector firms. International Review of Economics & Finance, 69, 1106–1116. https://doi.org/10.1016/j.iref.2018.12.008
Stein, J. C. (1989). Efficient capital markets, inefficient firms: A model of Myopic Corporate Behavior. The Quarterly Journal of Economics, 104(4), 655–669. https://doi.org/10.2307/2937861
Stulz, R. (1990). Managerial discretion and optimal financing policies. Journal of Financial Economics, 26(1), 3–27. https://doi.org/10.1016/0304-405X(90)90011-N
Su, K., & Liu, H. (2021). Financialization of manufacturing companies and corporate innovation: Lessons from an emerging economy. Managerial and Decision Economics, 42(4), 863–875. https://doi.org/10.1002/mde.3278
Tang, H., & Zhang, C. (2019). Investment risk, return gap, and financialization of non-listed non-financial firms in China. Pacific-Basin Finance Journal, 58, Article 101213. https://doi.org/10.1016/j.pacfin.2019.101213
Theurillat, T., Corpataux, J., & Crevoisier, O. (2010). Property sector financialization: The case of Swiss pension funds (1992–2005). European Planning Studies, 18(2), 189–212. https://doi.org/10.1080/09654310903491507
Tori, D., & Onaran, Ö. (2017). The effects of financialisation and financial development on investment: Evidence from firm-level data in Europe. https://doi.org/10.13140/RG.2.2.27043.86565
Tori, D., & Onaran, Ö. (2018). The effects of financialization on investment: Evidence from firm-level data for the UK. Cambridge Journal of Economics, 42(5), 1393–1416. https://doi.org/10.1093/cje/bex085
Xu, X., & Xuan, C. (2021). A study on the motivation of financialization in emerging markets: The case of Chinese nonfinancial corporations. International Review of Economics & Finance, 72, 606–623. https://doi.org/10.1016/j.iref.2020.12.026
Yu, H. L. (2022). Enterprises financialization: The reasons from the view of manager’s myopia. Business and Management Journal, 44(3), 55–71. https://doi.org/10.19616/j.cnki.bmj.2022.03.004
Zhang, H. L., & Lu, Z. F. (2012). The cash distribution, the corporate governance, and the over-investment: An investigation based on the state of the cash holdings of China’s listed companies and their subsidiaries. Journal of Management World, (3), 141–150+188. https://doi.org/10.19744/j.cnki.11-1235/f.2012.03.012
Zhang, M., Wang, A., & Zhou, S. (2023). Effect of analysts’ earnings pressure on environmental information disclosure of firms: Can corporate governance alleviate the earnings obsession? Borsa Istanbul Review, 23(2), 495–515. https://doi.org/10.1016/j.bir.2022.12.001
Zhao, Y., & Su, K. (2022). Economic policy uncertainty and corporate financialization: Evidence from China. International Review of Financial Analysis, 82, Article 102182. https://doi.org/10.1016/j.irfa.2022.102182
Zheng, J. H. (2002). Informational cascade, herd Behavior of manager and payment contract. China Industrial Economics, (3), 77–82. https://doi.org/10.19581/j.cnki.ciejournal.2002.03.010
Zheng, Z.-L., Gao, X., & Ruan, X.-L. (2019). Does economic financialization lead to the alienation of enterprise investment behavior? Evidence from China. Physica A: Statistical Mechanics and its Applications, 536, Article 120858. https://doi.org/10.1016/j.physa.2019.04.094
Zhou, X., Xu, X. F., & Lu, Z. F. (2020). Deleveraging, who is more positive and conservative? Journal of Management World, 36(8), 127–148. https://doi.org/10.19744/j.cnki.11-1235/f.2020.0123
Zhu, G. P., Gui, H. F., Peng, T., & Jiang, C. H. (2023). Corporate tax avoidance and corporate financialization: The moderating effect of managerial myopia. Managerial and Decision Economics, 44(1), 459–472. https://doi.org/10.1002/mde.3693
Albuquerque, A. (2009). Peer firms in relative performance evaluation. Journal of Accounting and Economics, 48(1), 69–89. https://doi.org/10.1016/j.jacceco.2009.04.001
Barton, J. (2001). Does the use of financial derivatives affect earnings management decisions? The Accounting Review, 76(1), 1–26. https://doi.org/10.2308/accr.2001.76.1.1
Bikhchandani, S., Hirshleifer, D., & Welch, I. (1992). A theory of fads, fashion, custom, and cultural change as informational cascades. Journal of Political Economy, 100(5), 992–1026. https://doi.org/10.1086/261849
Bikhchandani, S., & Sharma, S. (2000). Herd behavior in financial markets. IMF Staff Papers, 47(3), 279–310. https://doi.org/10.2307/3867650
Bo, H., Li, T., & Sun, Y. (2016). Board attributes and herding in corporate investment: Evidence from Chinese-listed firms. The European Journal of Finance, 22(4–6), 432–462. https://doi.org/10.1080/1351847X.2013.788536
Budescu, D. V., Rantilla, A. K., Yu, H.-T., & Karelitz, T. M. (2003). The effects of asymmetry among advisors on the aggregation of their opinions. Organizational Behavior and Human Decision Processes, 90(1), 178–194. https://doi.org/10.1016/S0749-5978(02)00516-2
Cao, W., Chen, C., Jiang, D., Li, W., & Zhang, Y. (2022). Industrial policy and non-financial corporations’ financialization: Evidence from China. The European Journal of Finance, 28(4–5), 397–415. https://doi.org/10.1080/1351847X.2021.1918204
Cen, W., & Tong, N. Q. (2018). Executive stock based compensation and investment herd behavior. Review of Investment Studies, 37(4), 57–73.
Cote, J., & Goodstein, J. (1999). A breed apart? Security analysts and herding behavior. Journal of Business Ethics, 18(3), 305–314. https://doi.org/10.1023/A:1005889208165
Davis, L. E. (2018). Financialization and the non-financial corporation: An investigation of firm-level investment behavior in the United States. Metroeconomica, 69(1), 270–307. https://doi.org/10.1111/meca.12179
Demir, F. (2009). Financial liberalization, private investment and portfolio choice: Financialization of real sectors in emerging markets. Journal of Development Economics, 88(2), 314–324. https://doi.org/10.1016/j.jdeveco.2008.04.002
Demirer, R., & Kutan, A. M. (2006). Does herding behavior exist in Chinese stock markets? Journal of International Financial Markets, Institutions and Money, 16(2), 123–142. https://doi.org/10.1016/j.intfin.2005.01.002
Devenow, A., & Welch, I. (1996). Rational herding in financial economics. European Economic Review, 40(3), 603–615. https://doi.org/10.1016/0014-2921(95)00073-9
Du, Y., Xie, J., & Chen, J. Y. (2019). CEO’s financial background and the financialization of entity enterprises. China Industrial Economics, 2019(5), 136–154. https://doi.org/10.19581/j.cnki.ciejournal.2019.05.008
Du, Y., Zhang, H., & Chen, J. Y. (2017). The impact of financialization on future development of real enterprises’ core business: Prompotion or inhibition. China Industrial Economics, (12), 113–131. https://doi.org/10.19581/j.cnki.ciejournal.20171214.007
Duchin, R. A. N., Gilbert, T., Harford, J., & Hrdlicka, C. (2017). Precautionary savings with risky assets: When cash is not cash. The Journal of Finance, 72(2), 793–852. https://doi.org/10.1111/jofi.12490
Fang, J. X. (2012). Corporate investment decision-making convergence in China: Herd behavior or wave phenomenon? Journal of Finance and Economics, 38(11), 92–102. https://doi.org/10.16538/j.cnki.jfe.2012.11.002
Feng, Y., Yu, Q., Nan, X., & Cai, Y. (2022). Can employee stock ownership plans reduce corporate financialization? Evidence from China. Economic Analysis and Policy, 73, 140–151. https://doi.org/10.1016/j.eap.2021.11.002
Gehringer, A. (2013). Growth, productivity and capital accumulation: The effects of financial liberalization in the case of European integration. International Review of Economics & Finance, 25, 291–309. https://doi.org/10.1016/j.iref.2012.07.015
Graham, J. R. (1999). Herding among Investment Newsletters: Theory and evidence. The Journal of Finance, 54(1), 237–268. https://doi.org/https://doi.org/10.1111/0022-1082.00103
Hirshleifer, D., Hou, K., Teoh, S. H., & Zhang, Y. (2004). Do investors overvalue firms with bloated balance sheets? Journal of Accounting and Economics, 38, 297–331. https://doi.org/10.1016/j.jacceco.2004.10.002
Hong, H., Kubik, J. D., & Solomon, A. (2000). Security analysts’ career concerns and herding of earnings forecasts. The RAND Journal of Economics, 31(1), 121–144.
Hu, Y. M., Wang, X. T., & Zhang, J. (2017). The motivation for financial asset allocation: Reservoir or substitution? – evidence from Chinese listed companies. Economic Research Journal, 52(1), 181–194.
Jian, M., & Lee, K. W. (2011). Does CEO reputation matter for capital investments? Journal of Corporate Finance, 17(4), 929–946. https://doi.org/10.1016/j.jcorpfin.2011.04.004
Jiang, F., & Kim, K. A. (2015). Corporate governance in China: A modern perspective. Journal of Corporate Finance, 32, 190–216. https://doi.org/10.1016/j.jcorpfin.2014.10.010
Jin, X. M., Mai, Y., & Cheung, A. W. K. (2022). Corporate financialization and fixed investment rate: Evidence from China. Finance Research Letters, 48, Article 102898. https://doi.org/10.1016/j.frl.2022.102898
Kameda, T., & Nakanishi, D. (2003). Does social/cultural learning increase human adaptability?: Rogers’s question revisited. Evolution and Human Behavior, 24(4), 242–260. https://doi.org/10.1016/S1090-5138(03)00015-1
Knyazeva, A., Knyazeva, D., Morck, R., & Yeung, B. Y. (2008). Comovement in investment (Simon School Working Paper). https://doi.org/10.2139/ssrn.1017323
Kornelakis, A., & Gospel, H. (2018). CEO pay and corporate financialization. In The Routledge companion to reward management (pp. 298–308). Routledge. https://doi.org/10.4324/9781315231709-31
Krippner, G. R. (2005). The financialization of the American economy. Socio-Economic Review, 3(2), 173–208. https://doi.org/10.1093/SER/mwi008
Lazonick, W. (2013). The financialization of the U.S. corporation: What has been lost, and how it can be regained. Seattle University Law Review, 36(2), 857–910.
Lei, L., Zheng, D., & Chen, X. (2022). Corporate social responsibility and corporate financialization – Based on information effect and reputation insurance effect. PloS ONE, 17(7), Article e0271552. https://doi.org/10.1371/journal.pone.0271552
Li, Q. M., & Liang, Q. X. (2020). How does “Transforming the economy from substantial to fictitious” spread? Based on the perspective of peer effects. Journal of Finance and Economics, 46(8), 140–155. https://doi.org/10.16538/j.cnki.jfe.2020.08.010
Li, Z., & Wang, Y. (2021). Is there a moderate range of impact of financialization on corporate R&D? PloS ONE, 16(6), Article e0253380. https://doi.org/10.1371/journal.pone.0253380
Lieberman, M. B., & Asaba, S. (2006). Why do firms imitate each other? Academy of Management Review, 31(2), 366–385. https://doi.org/10.5465/amr.2006.20208686
Narayanan, M. P. (1985). Managerial incentives for short-term results. The Journal of Finance, 40(5), 1469–1484. https://doi.org/10.1111/j.1540-6261.1985.tb02395.x
Prendergast, C., & Stole, L. (1996). Impetuous youngsters and jaded old-timers: Acquiring a reputation for learning. Journal of Political Economy, 104(6), 1105–1134. http://www.jstor.org/stable/2138935
Roider, A., & Voskort, A. (2016). Reputational herding in financial markets: A laboratory experiment. Journal of Behavioral Finance, 17(3), 244–266. https://doi.org/10.1080/15427560.2016.1203322
Scharfstein, D. S., & Stein, J. C. (1990). Herd behavior and investment. The American Economic Review, 80(3), 465–479. http://www.jstor.org/stable/2006678
Seo, H. J., Kim, H. S., & Kim, Y. C. (2012). Financialization and the slowdown in Korean firms’ R&D investment. Asian Economic Papers, 11(3), 35–49. https://doi.org/10.1162/ASEP_a_00160
Shi, X., Bu, D., Wen, C., & Lan, Z. (2021). Financial background of controlling shareholder and corporate financialization. China Journal of Accounting Studies, 9(3), 383–407. https://doi.org/10.1080/21697213.2021.2009177
Shin, H. S., & Zhao, L. (2013). Firms as surrogate intermediaries: Evidence from emerging economies. Asian Development Bank.
Shu, J., Zhang, C., & Zheng, N. (2020). Financialization and sluggish fixed investment in Chinese real sector firms. International Review of Economics & Finance, 69, 1106–1116. https://doi.org/10.1016/j.iref.2018.12.008
Stein, J. C. (1989). Efficient capital markets, inefficient firms: A model of Myopic Corporate Behavior. The Quarterly Journal of Economics, 104(4), 655–669. https://doi.org/10.2307/2937861
Stulz, R. (1990). Managerial discretion and optimal financing policies. Journal of Financial Economics, 26(1), 3–27. https://doi.org/10.1016/0304-405X(90)90011-N
Su, K., & Liu, H. (2021). Financialization of manufacturing companies and corporate innovation: Lessons from an emerging economy. Managerial and Decision Economics, 42(4), 863–875. https://doi.org/10.1002/mde.3278
Tang, H., & Zhang, C. (2019). Investment risk, return gap, and financialization of non-listed non-financial firms in China. Pacific-Basin Finance Journal, 58, Article 101213. https://doi.org/10.1016/j.pacfin.2019.101213
Theurillat, T., Corpataux, J., & Crevoisier, O. (2010). Property sector financialization: The case of Swiss pension funds (1992–2005). European Planning Studies, 18(2), 189–212. https://doi.org/10.1080/09654310903491507
Tori, D., & Onaran, Ö. (2017). The effects of financialisation and financial development on investment: Evidence from firm-level data in Europe. https://doi.org/10.13140/RG.2.2.27043.86565
Tori, D., & Onaran, Ö. (2018). The effects of financialization on investment: Evidence from firm-level data for the UK. Cambridge Journal of Economics, 42(5), 1393–1416. https://doi.org/10.1093/cje/bex085
Xu, X., & Xuan, C. (2021). A study on the motivation of financialization in emerging markets: The case of Chinese nonfinancial corporations. International Review of Economics & Finance, 72, 606–623. https://doi.org/10.1016/j.iref.2020.12.026
Yu, H. L. (2022). Enterprises financialization: The reasons from the view of manager’s myopia. Business and Management Journal, 44(3), 55–71. https://doi.org/10.19616/j.cnki.bmj.2022.03.004
Zhang, H. L., & Lu, Z. F. (2012). The cash distribution, the corporate governance, and the over-investment: An investigation based on the state of the cash holdings of China’s listed companies and their subsidiaries. Journal of Management World, (3), 141–150+188. https://doi.org/10.19744/j.cnki.11-1235/f.2012.03.012
Zhang, M., Wang, A., & Zhou, S. (2023). Effect of analysts’ earnings pressure on environmental information disclosure of firms: Can corporate governance alleviate the earnings obsession? Borsa Istanbul Review, 23(2), 495–515. https://doi.org/10.1016/j.bir.2022.12.001
Zhao, Y., & Su, K. (2022). Economic policy uncertainty and corporate financialization: Evidence from China. International Review of Financial Analysis, 82, Article 102182. https://doi.org/10.1016/j.irfa.2022.102182
Zheng, J. H. (2002). Informational cascade, herd Behavior of manager and payment contract. China Industrial Economics, (3), 77–82. https://doi.org/10.19581/j.cnki.ciejournal.2002.03.010
Zheng, Z.-L., Gao, X., & Ruan, X.-L. (2019). Does economic financialization lead to the alienation of enterprise investment behavior? Evidence from China. Physica A: Statistical Mechanics and its Applications, 536, Article 120858. https://doi.org/10.1016/j.physa.2019.04.094
Zhou, X., Xu, X. F., & Lu, Z. F. (2020). Deleveraging, who is more positive and conservative? Journal of Management World, 36(8), 127–148. https://doi.org/10.19744/j.cnki.11-1235/f.2020.0123
Zhu, G. P., Gui, H. F., Peng, T., & Jiang, C. H. (2023). Corporate tax avoidance and corporate financialization: The moderating effect of managerial myopia. Managerial and Decision Economics, 44(1), 459–472. https://doi.org/10.1002/mde.3693