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| Corporate Financial Asset Allocation and Long-term Risk of Stock Price Volatility: An Analysis from the Perspective of Investors' Expectation on Corporate Financial Asset Allocation |
| GUO Guixia, SUN Jialiang
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| School of Economics,University of International Business and Economics |
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Abstract The issue of financial asset allocation of Chinese corporations has drawn great attention from both the government and the academia. Attracted by high profit margins, many companies have chosen to allocate financial assets, aiming to promote business development through such activities. On one hand, the government must guard against the risks of “shifting focus from the real to the virtual economy” brought by corporate financial asset allocation, but on the other hand, it should guide financial markets to foster enterprise growth, thereby achieving the goal of “utilizing the virtual to support the real economy”. As a direct reflection of the market's evaluation of enterprise value, stock prices reflect investors' assessments and expectations of corporate behavior. Consequently, changes in a company's asset allocation can impact the long-term risk of stock price volatility. Against this background, an issue that urgently needs to be addressed is, accurately understanding the impact of corporate financial asset allocation on long-term risk of stock price volatility from the perspective of investor expectations. A deep understanding of this issue is thus essential for effectively regulating and mitigating the risks associated with corporate financial asset allocation, to create a positive interaction between financial markets and the real economy.
Building on the classic model of Grossman and Stiglitz (1980), this paper incorporates corporate financial asset allocation, investors' expectations of corporate financial asset allocation and their investment decisions into a unified theoretical framework, so as to analyze the impact of corporate financial asset allocation on the risk of long-term risk of stock price volatility. A key assumption is that investors have differentiated expectations regarding corporate financial asset allocation: investors with optimistic (pessimistic) expectations believe that an increase in the level of corporate financial asset allocation will enhance (reduce) the firm's stock value and its stability. Through mathematical deductions, propositions are derived, testable hypotheses are formulated and then empirically tested using data from Chinese listed companies from 2008 to 2022. We found that the impact of corporate financial asset allocation on long-term risk of stock price volatility exhibits “pro-cyclicality”: in markets dominated by investors with optimistic (pessimistic) expectations about corporate financial asset allocation, corporate financial asset allocation reduces (increases) the long-term risk of stock price volatility. Mechanism analysis shows that corporate financial asset allocation can alleviate the long-term risk of stock price volatility by clarifying investor expectations and by reducing overconfidence of investors, but it may increase the long-term risk of stock price volatility by curbing the development of enterprises' main businesses, and thus increase the pessimistic expectations of investors on corporate financial asset allocation.
Based on these findings, several policy recommendations are proposed. Firstly, at the investor level, investors should keep an active eye on the information about corporate financial asset allocation, correctly view the behavior of corporate financial asset allocation, and enhance their financial literacy. This helps avoid forming irrationally pessimistic expectations about financial asset allocation by some investors, thereby reducing the potential risks arising from financial asset allocation. Secondly, at the corporate level, companies should reasonably allocate financial assets, harness the positive role of financial assets, and achieve a win-win situation where financial services support the real economy. For companies with poor operating conditions, more caution should be exercised in dealing with the risks that financial asset allocation may bring about under the influence of pessimistic investor expectations, in order to prevent further deterioration of their capital market performance. Finally, at the regulatory level, regulatory authorities could refer to market sentiment indicators and adopt corresponding constraints to implement “pre-emptive regulation” from the perspective of investor expectations, preventing the increased long-term risk of stock price volatility under the influence of strong pessimistic expectations. Regulatory authorities should pay close attention to the changes in financial market sentiment, remain vigilant against the “pro-cyclicality” nature of financial asset allocation, and guard against the negative effects of financial asset allocation during economic downturns, particularly when irrationally pessimistic expectations dominate the market.
Marginal contributions of this paper are multifold. Firstly, this paper builds up a theoretical model from the investors' perspective, incorporating their differentiated expectations regarding corporate financial asset allocation, which allows for a more accurate modelling of the irrational behavior in the stock market. Secondly, it innovatively proposes that corporate financial asset allocation, by changing the asset structure, affects the precision of the information set relied upon by investors in their decision-making, thereby helping to mitigate the degree of investor overconfidence. Thirdly, it considers the signaling effect of financial asset allocation. Corporate financial asset allocation can clarify investor expectation, which in turn influences the long-term risk of stock price volatility. Finally, it finds that the impact of corporate financial asset allocation on the long-term risk of stock price volatility has a nature of “pro-cyclicality”, which helps provide valuable insights for regulatory authorities in implementing “pre-emptive regulation” of corporate financial asset allocation behaviors.
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Received: 16 October 2023
Published: 01 February 2025
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| Cite this article: |
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GUO Guixia,SUN Jialiang. Corporate Financial Asset Allocation and Long-term Risk of Stock Price Volatility: An Analysis from the Perspective of Investors' Expectation on Corporate Financial Asset Allocation[J]. Journal of Financial Research,
2025, 535(1): 114-133.
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| URL: |
| http://www.jryj.org.cn/EN/ OR http://www.jryj.org.cn/EN/Y2025/V535/I1/114 |
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