Excessive financialization and “Original Sin Theory”: redemption from corporate reputation

Abstract

Empirical studies suggest that excessive financialization that firms invest in a high proportion of financial assets will have a negative impact on firm value. This goes against the capital asset pricing theory, which suggests that high risk can produce high expected return. However, there is no explanation for the negative effect. We have empirically found that financial investments can yield higher expected returns compared with physical investments at any level, which aligns with the capital asset pricing theory. However, excessive financialization can harm a company’s reputation, which can be measured through product and service competitiveness, research and development output, and corporate social responsibility. As corporate reputation is an important intangible asset, excessive financialization has a negative impact on the overall firm value. Furthermore, excessive financialization has a greater negative impact on corporate reputation for firms with high financial leverage and sensitivity to economic policy uncertainty.