Excessive Financialization and “Original Sin Theory” : Redemption from Corporate Reputation

The capital asset pricing model (CAPM) shows that there is a positive relation between investment risk and expected return. However, empirical studies find that excessive financialization that firms invest in a high proportion of financial risk assets will have a significant negative effect on firm value. In this context, there is a lack of explanation for the debate between theoretical findings and empirical results. Accordingly, we find that financial investments will produce higher expected returns compared to physical investments at any level, which coincides with the capital asset pricing model. Furthermore, we find that financial investments exceeding a certain threshold proportion can damage corporate reputation and reduce intangible assets, which produces a negative effect on firm value ultimately. The negative effect of excessive financialization on corporate reputation is more pronounced for firms with high financial leverage and sensitive to economic policy uncertainty