It ^[1][2][6,7] has been empirically established that financialization has a negative effect on capital accumulation when resource and production input factors are established. The capital misallocation causes poor allocation of resources, leading to a negative effect on aggregate total factor productivity (TFP). Unlike these papers, recently it ^[3][4][5] waorks [8,9,10] highlighted that a a positive effect. These wapapers suggested that non-financial companies could capture higher value through financialization during market booms. Both of these arguments are true to some extent. Previous one wasliterature stateds that corporate financialization is mainly driven by profit-seeking and risk aversion ^[6][7][11,12]. Financialization in high-yielding firms is more likely to capture the value of surplus liquidity and achieve optimal capital allocation ^[8][13], while financialization in low-yielding firms shows a tendency to pursue a higher return as its survival is threatened ^[9][14]. The extent to which TFP is affected by financialization depends on how corporate financialization decisions are made. More specifically, if motivated by speculation, firms will hold more financial assets considering the balance between risk and return,. which can be inferredWe can infer that the impact of corporate financialization on firms’ TFP will most likely differ across firms. The natural question then is: When does corporate financialization stimulate TFP, and under what conditions does financialization hinder the growth of TFP? Responses to such causal effects will most likely differ across firms. Thus, it is interesting to contrast potential heterogeneity in TFP due to a firm’s own financialization choice.

Corporate investment choices are not calculated at random, but rather are made intentionally by firms or managers based on their preferences ^[10][15]. Corporate investment behavior analyses have shown that the process of making investment decisions often includes subjective judgment of the investor’s and manager’s behaviors ^[11][12][16,17]. In many casituationes, corporate investment decisions face a trade-off between short-term profit maximization and long-term business strategy. It can be seen that there is a selection effect along with corporate financialization, which is influenced by both observable and unobservable factors. Existing onliterature has been eestablished that corporate financialization is associated with a statistically significant effect on aggregate productivity, explained by firm-specific determinants. Firm-specific determinants (size, profitability, growth, etc.) are the most important observable factors in choosing financialization. Measuring unobservable factors is not an easy task, and yet, little has been achieved regarding unobserved factors to assess the effect of corporate financialization on TFP.

In summary, the existing onlite wasrature pointeds to the impacts of corporate financialization on TFP. Nevertheless, to the best of theour knowledge, no previous oneresearch has assessed the heterogeneous effect of corporate financialization on TFP induced by self-selection. Here, it wasIn this study, we do so under the framework of marginal treatment effects (MTE) using samples of Chinese listed non-financial companies during the period from 2007 to 2018. Translated into theour research question, the MTE is the effect of financialization on outcomes for firms at the margin of choosing financialization. The MTE framework also allows for depicting the marginal effects along with the probability of choosing financialization (which is the local average treatment effect). Accordingly, as an empirical matter, it was fouwe find that the use of housing prices as the instrument affects financialization exactly as expected. In particular, it waswe further conducted a counterfactual analysis to reconstruct house price fluctuations and corporate financialization decisions from a foresight perspective. It was We then assessed the level of TFP according to a given counterfactual environment. Also, there was aWe also try to substantiate theour results by looking at the potential mechanism of the average effects from the view of innovation. It was shownWe show that in companies with low financialization propensity, there is a positive effect of corporate financialization on TFP, whereas firms with high financialization propensity and low investment resistance experience a suppressive effect pf TFP.

2. Heterogeneity of Corporate Financialization and Total Factor Productivity

A fundamental question with investment decisions is whether to invest, as well as the allocation of capital to the right investment projects, such as that modeled by Dobrowolski and Drozdowski ^[13][18] and Drozdowski ^[14][19]. These papers have been contributed to theour understanding of how the net present value (NPV) can be used in capital budgeting and investment planning. Some argue that the observed TFP reflects differences in the composition and quality of labor and other productive factors ^[15][16][20,21]. In particular, Männasoo et al. ^[17][22] show that human capital endowment positively affected TFP growth. The quality of human capital may depend on some unobservable factors such as personal education, training, new qualifications, and skills ^[18][23]. Capturing this sentiment, as the TFP is typically measured relative to the labor productivity, the input quality is determined by the capital intensity and average ability of the composition of the labor force, which can be difficult to quantify in practice. Others contend that investment periods vary across firms with information asymmetries. The “Holdup Losses” theory suggests that the manager prefers long-term projects to short-term projects. However, Narayanan ^[19][24] asserts that the manager selects short-term projects in an attempt to inflate the labor market’s perception of his value. Barnett et al. ^[20][25] suggest that firms tend to shift their sustainability strategy in long-term innovative ways that enable them to maximize firm value. Undoubtedly, both lines of explanation play a role, and it is important to disentangle their relative importance between short-term profit maximization and long-term business strategy. Corporate financialization can be defined as a firm making substantial investments in financial assets ^[21][26]. To date, there has been valuable theoretical and empirical research on corporate financialization, and most of the studies tend to focus on the impact of corporate financialization. Two broad lines of corporate financialization consequences have been brought forward. Some empirical research provides evidence that corporate financialization can stimulate the short-term performance of firms ^[22][23][2,3], while in the long term, with a high level of financialization, corporate firms tend to pay less attention to the core business, resulting in lower physical investments and productivity loss. IThe literat has been eure has established that corporate financialization could crowd out operating cash flows that promote innovation ^[24][25][27,28]. Motivated by the conflicting empirical evidence on the subject, there is no clear theoretical consensus as to the most favorable forms of corporate investment, while a sizeable body of literature has engaged in documenting and analyzing the outcomes of financialization decisions and assessing whether the choice is an optimal investment. The extant onlite wasrature inspired by Cortty ^[26][29] calls for research that focuses on the observable causes of corporate financialization such as capital expenditures, liquidity, and financial constraints, whereas itwe are focused on unobservable factors changes in corporate investment behavior. It was aWe also highlighted that th the choice of corporate financialization in affecting TFP. Undoubtedly, both capital surplus and managers’ preferences can exert a selection effect on financialization decisions. Furthermore, investment decisions primarily reflect the subjective judgment of the investor’s and manager’s behaviors ^[11][12][16,17]. Hence, it could bwe inferred that unobservable factors may play a role in the effect of corporate financialization. The MTE framework allows us to assess its effects on firm efficiency to an extent not found in earlier studies. Evidence on the effect of corporate financialization on the TFP is mixed, with effects ranging from negative to positive. Responses to such causal effects will most likely differ across firms and choice margins. TheOur goal is to better understand when firms benefit most from financialization and whether there exists treatment effect heterogeneity due to a firm’s choice probability of financialization. Much of the applied work continued to assume homogeneous treatment effects between corporate financialization and the TFP, which ignored the problem of endogeneity caused by self-selection into treatment based on unobserved characteristics. The MTE is informative about the nature of selection into treatment, which can clarify the connection of the switching regime self-selection. Moreover, the MTE allows heterogeneous treatment effects along the choice margin, which can reconcile the mixed empirical evidence on the relationship between corporate financialization and productivity.