Regional Green Development and Corporate Financialization: A Quasi-Natural Experiment on the Ecological Conservation and High-Quality Development of the Yellow River Basin

Abstract

The implementation of the Ecological Conservation and High-Quality Development of the Yellow River Basin (YBCD) can provide the institutional context for economic outcomes of environmental regulations and influences on corporate financial asset allocation. The basic objective of this study is to examine the impact of the YBCD on corporate financialization, analyzing the influencing mechanisms and heterogeneity. Using the data of A-share listed companies spanning 2015 to 2022 in China, this study employs the differences-in-differences method to investigate the impact of the YBCD on corporate financialization. The findings reveal that (1) the YBCD could significantly inhibit corporate financialization and suppress financial asset allocation driven by arbitrage motivation. It will help corporate financial asset allocation shift towards physical businesses, emphasizing long-term development. (2) The YBCD could inhibit corporate financialization by reducing corporate agency costs and fostering environmental, social, and governance (ESG), leading to crowding-out effects on financial assets. (3) The heterogeneity analysis indicates that the YBCD could generate significant inhibitory effects on corporate financialization in non-state-owned enterprises, high-polluting companies, and companies located in regions with stronger environmental regulations.

1. Introduction

Since the reform and opening up, the economic development of China has consistently exhibited growth, as the main driver of the global economy. Nevertheless, this extensive economic growth has resulted in environmental damage, air pollution, and resource waste, incongruent with sustainable development [1,2,3,4]. In response to global environmental degradation and economic downturn, the Chinese government has adjusted economic targets and developing patterns according to practical conditions [5,6]. The new development philosophy, which includes innovation, coordination, greenness, openness, and sharing, has produced physical outcomes. Notably, regional green development [7,8] occupies a pivotal position in this process. Numerous studies indicated that regional environmental policies would yield considerable impacts on corporate environmental actions, particularly concerning green technology [9,10] and innovative development [11,12]. In practice, companies tend to comply with the environmental targets outlined by various governments, promoting green development [13]. Consequently, this study posits that the environmental targets of governments could play a guiding role in high-quality economic development and inevitably influence corporate financial asset allocation. However, few scholars have investigated the investment and financing of companies from the perspective of regional green development.

The physical economy stands as a cornerstone for China to pursue high-quality development. However, the recent dramatic changes in global economic conditions have led to continuous declines in the profit margin of physical investments in China. An increasing number of companies are redirecting their focus towards identifying new avenues for profit growth. These companies choose to allocate assets to financial industries for higher returns and gradually deviate from initial core businesses, consequently leading to corporate over-financialization. However, over-financialization could impair corporate investment actions [14], R & D capabilities [15], and even macro-economic operations, thereby intensifying financial disorder and corrupt practices. In this context, inhibiting corporate financialization and reducing financial risks are a priority task for China.

Research findings indicated that agency conflict is the critical factor influencing corporate financialization [16,17,18]. As a government-driven economy [19], the implementation of regional green development policies by China could reduce agency conflicts among companies, providing a feasible way to inhibit corporate financialization. Obviously, the impact of environmental governance has been neglected, particularly in corporate financialization. The ability of governments to allocate resources would inevitably influence corporate investment actions [20]. Thus, it is necessary to pay attention to the environmental governance of governments when studying issues related to corporate financialization [21].

The Ecological Conservation and High-Quality Development Strategy of the Yellow River Basin (YBCD), introduced by China in September 2019, presents an institutional context for exploring these questions. The Yellow River stands out among rivers worldwide for its high sediment, challenging controllability, and significant damage. Notably, there is an issue of uneven and insufficient development across provinces along the Yellow River, marked by severe soil erosion and limited ecological carrying capacity. To cope with these challenges, China launched the YBCD to offer principles of green development and to emphasize the conservation of water resources, intensify environmental governance, and require companies to implement green transformations and market-oriented reforms. It is valuable to investigate whether the YBCD could generate impacts on corporate financialization.

From a theoretical perspective, the YBCD could influence corporate financial asset allocation in two ways. Firstly, the YBCD could facilitate the oversight of corporate and executive behaviors, reducing agency conflicts [18]. Furthermore, it would suppress executives’ financial asset allocations driven by “investment substitution”, ultimately inhibiting corporate financialization in the Yellow River Basin. Secondly, the YBCD could release robust signals [22] to companies; promote the construction of environmental, social, and governance (ESG); and improve profitability [23], decreasing reliance on returns from financial asset investments.

This study selected China as its research background for two primary reasons. Firstly, the YBCD, launched in China, offers a unique quasi-natural experiment for exploring the economic outcomes of environmental regulation. It could solve endogenous problems and sample selection bias, facilitating precise estimations for the net impact of environmental regulation on corporate financial asset investment. Secondly, the YBCD could help to investigate the external governance functions of governments and validate policy implementation capabilities within developing countries. Unlike well-established financial markets in developed countries, the Chinese capital market was created relatively recently, and has been described as possessing weak external regulatory mechanisms by analysts and auditors [24]. Moreover, the administrative intervention of the Chinese government might provide proper contexts for assessing external governance functions [25]. Simultaneously, environmental challenges and the shift of the economy from physical to virtual might threaten the economic operations and sustainable development of China. Given insufficient environmental policies [26] and the predominance of governments, the YBCD would provide an institutional context for evaluating the effects of governments.

Based on the data of Chinese A-share listed companies spanning from 2015 to 2022, this study takes the YBCD as a quasi-natural experiment to examine its impact on corporate financialization. Initially, the research findings reveal that the YBCD could significantly inhibit corporate financialization by suppressing arbitrage motivations. Subsequently, this study explored the underlying mechanisms by which the YBCD could influence corporate financialization by reducing agency costs and fostering corporate ESG. Lastly, the heterogeneity analysis underscores that the YBCD could exert negative impacts on corporate financialization in non-state-owned companies, high-polluting companies, and companies located in regions with stronger environmental regulations.

This study’s potential contributions are as follows:

First, this study focuses on the Yellow River Basin for the first time to examine the impact of green development strategies on corporate investments and extends the research perspective of regional governance. Similar studies have focused on the Yangtze River Basin [19,27,28], but few studies have focused on the Yellow River Basin. This study firstly reveals the impact of the YBCD on corporate investments and analyzes the influencing mechanism. These efforts would help to promote the economic development of the Yellow River Basin and optimize corporate investments.

Second, these attempts will enrich the research on regional green development strategies for corporate financialization. Regional green development strategies are important environmental regulation policies. Existing studies have found that regional green development strategies could produce positive impacts on corporate green technology [9,10] and green innovation [11,12]. They mainly focus on corporate environmental performances, but few studies have tried to explore the impact of regional green development strategies on corporate financialization. In the context of the corporate “real to virtual” shift, it is necessary to examine whether governments can guide companies to reduce their allocation of financial assets under regional green development strategies. Therefore, this study examines the impact of the YBCD on corporate financialization and expands the research on economic consequences.

Third, the factors of corporate financialization are identified and verified. Existing studies mainly focused on macro-economic [29,30,31] and corporate-specific factors [17,18], overlooking the impact of regional green development strategies on corporate financialization. In view of this, this study attempts to discuss the corrective effect of environmental regulation on corporate financialization with the implementation of the YBCD, expands the research on the factors of financialization, and clarifies the dispute on the relationship between environmental regulation and corporate financialization [32,33]. At present, the negative effects of excessive financialization of companies are becoming increasingly serious, squeezing the investments in physical assets and environmental protection. Exploring the factors affecting corporate financialization is significant for reducing financial risks and stabilizing the financial market. At the same time, this study found that the implementation of the YBCD would inhibit the “speculative arbitrage” motivation of corporate financialization, rather than the “reservoir” motivation, further clarifying the effect of regional green development strategies on financialization.

Fourth, this study verifies the influencing mechanism of regional green development strategies on corporate financialization, offering practical insights for the transformation of companies from virtual to physical. Through empirical analyses, this study indicated that the YBCD would reduce corporate agency costs and foster ESG for inhibiting corporate financialization. These influencing mechanisms could not only clarify the relationship between regional green development strategies and corporate financialization, but also provide feasible pathways high-quality development in the Yellow River Basin. In addition, the YBCD could have significant inhibitory effects on non-state-owned companies, high-polluting companies, and companies located in regions with stronger environmental regulations.

The structure of the subsequent parts is organized as follows: The second part encompasses the literature review and theoretical hypotheses. The third part is the research design. The fourth part shows the empirical results. The fifth part provides further discussions. The sixth part provides a discussion and the final part offers our main conclusions and policy implications.

2. Literature Review and Theoretical Hypothesis

2.1. Literature Review

2.1.1. Research on Economic Outcomes of Regional Policies

Regional policies fundamentally represent the utilization of administrative intervention to reallocate elements and resources. Glaeser and Gottleib indicated that regional policies could significantly affect corporate micro actions [34]. Current research illustrates that targeted subsidies in regions would effectively stimulate corporate investment actions, but gradually weaken year by year after policy implementation [35,36,37,38,39]. Regional planning might promote the spatial aggregation of human capital and reduce the cost of intermediate products and labor, ultimately enhancing corporate production efficiencies [40].

Specifically, previous studies indicated that regional environmental regulations would contribute to fostering green technology [9]. Policy incentives and stringent environmental regulations could significantly encourage companies to develop green technologies [10,41,42], as well as stimulate innovative development [11,12]. However, some scholars illustrated that rigorous environmental regulations might increase pollution-controlling costs for companies [43], thereby crowding out productive investments in green technologies [44]. Additionally, Shen et al. revealed that environmental taxes could emphasize the environmental impact of products and augment investments in green technologies [45].

2.1.2. Research on the Potential Factors of Corporate Financialization

Corporate financialization is predominantly shaped by macro-economic and internal factors. The former shows that expansionary monetary policies and governmental subsidies might intensify corporate financialization [30,46], while industrial development policies and stock market openness produce inhibitory effects [47,48]. Theoretical research has discussed the impact of economic uncertainties on corporate financialization by promotion [15,29], inhibition [49], and U-shaped dynamics [31]. Regarding corporate internal factors, previous studies revealed that increasing investment opportunities could amplify corporate financial asset allocation, while executives’ financial distress experiences might generate inhibitory effects on corporate financialization [50]. Additionally, enhancing internal governance and implementing employee stock ownership would decrease corporate financialization [16,17,18].

2.1.3. Literature Commentary

Existing research demonstrates that scholars have offered valuable insights into potential factors on corporate financialization and the economic outcomes of regional governance, providing crucial references. However, under the shift of the economy from physical to virtual and the concept of green development, limited attention has been devoted to investigating the impacts and mechanisms of regional green development strategies on corporate financialization. This study attempts to examine the impact of the YBCD on corporate financialization, based on theoretical and empirical perspectives. These efforts would contribute to proposing policy recommendations for promoting high-quality development in the Yellow River Basin and facilitating the shift of companies from virtual to physical.

2.2. Theoretical Hypothesis

Financial assets serve as tools for liquidity management, imparting positive effects to companies. However, during a period of economic recession, financial assets could be utilized for speculative arbitrage. These actions might lead to corporate over-financialization that constrains physical investments and technological innovations in companies [15], as well as generating negative impacts on income distribution and social demand. Previous studies illustrated that agency conflicts act as a critical role for corporate financialization [16,17,18]. The YBCD can supervise corporate and executive actions to reduce agency conflicts, foster corporate ESG, and ultimately inhibit corporate financialization in the Yellow River Basin.

On one hand, based on agency theory and other regional green development strategies [19,28], the YBCD must insist on the principle of “protection in development”, which integrates ecological and resource carrying capacities into the constraint conditions of economic development, facilitating economic growth while enhancing environmental performance.

This strategy would exert pressures on local companies to adopt green production, strengthen the supervision of enterprises in the aspects of government [51] and public opinion [52], and compel executives to decrease financial asset allocation driven by “investment substitution”, consequently crowding out financial assets and inhibiting corporate financialization.

Primarily, according to organizational legitimacy theory, corporate executives’ actions can be interfered with and guided by external policies and laws. To enhance legitimacy and social recognition, executives’ operational actions should align with governmental guidance [51]. Under the YBCD, environmental legislation and law enforcement are continuously improved; for example, the Supreme People’s Court issued the Opinions on Providing Judicial Services and Guarantees for the Ecological Protection and High-Quality Development of the Yellow River Basin in 2020. It strengthens the oversight of corporate executives to reduce agency conflicts associated with the over-allocation of financial assets. Under the pressure of legal compliance, corporate executives will reduce agency actions and financial asset allocation.

Secondly, the implementation and evaluation of the YBCD will elevate the shares of environmental performance. Based on political tournament theory, local officials would opt to intensify their focus on green development through effective measures for regulating and guiding companies to green production [53]. Given the administrative intervention of Chinese governments, regulatory pressures might produce deterrents to executives’ agency actions [25]. Executives would incorporate environmental management into corporate strategies and allocate resources to reduce arbitrage-driven financial assets, resulting in crowd-out effects for financial investments.

Lastly, the YBCD could amplify the environmental pressures faced by companies’ executives driven by the public and the media. Once corporate environmental pollution practices are disclosed, companies and executives are more likely to be punished by regulators [52]. Reputation theory suggests that the punishment of companies and executives could convey negative signals to external stakeholders, which may seriously damage corporate reputation and executives’ careers, thus affecting the long-term development of companies [54]. Executives would shift their attention towards corporate green transformation and decrease financial asset allocation to cultivate corporate green images and mitigate moral censure, government penalties, and litigation risks related to environmental concerns.

On the other hand, the YBCD would enforce environmental regulation and supervision. Companies located in the Yellow River Basin can focus on green transformation, allocating resources to environmental preservation and fostering the construction of ESG [55,56], at which time funds will not flow to the allocation of financial assets and reduce financialization. Meanwhile, ESG construction can reduce information asymmetry [57], alleviate financing constraints [58], improve the green innovation level of enterprises [23,59], and ultimately improve corporate performance [60,61,62]. At this time, the level of profitability increases, and the management has no incentive to obtain investment returns by allocating too many financial assets, thus reducing the level of financialization.

Primarily, previous studies indicated that ESG could alleviate market information asymmetry [57], enhance corporate values [58], and reduce financial asset allocations. Following the implementation of the YBCD, companies would invest in ESG to intensify the nexus between companies and market, alleviate information asymmetry among companies and stakeholders, and enhance investors’ understanding of risks and values [63]. These endeavors would contribute to cultivating trust among stakeholders, including financial institutions, suppliers, and customers; decreasing operational costs; enhancing operational efficiency; and improving financial performance [64,65,66]. Meanwhile, as companies with excellent ESG performance would pay more attention to environmental protection, their operating cash flow could be more robust. This can avoid investors being disturbed by the uncertainty of environmental policies, resulting in positive feedback from the market and boosting corporate values. Therefore, the YBCD would reinforce the construction of corporate ESG, enhance corporate performance, and reduce financial assets for investment returns, thus inhibiting corporate financialization.

Secondly, ESG can bolster corporate investments in green innovation by alleviating financing constraints [58] and enhancing employee innovation, thus enhancing operational performance and inhibiting financial asset allocation. Following the implementation of the YBCD, companies located in the Yellow River Basin would not only provide higher-quality financial information but also broadcast positive signals to expose operational conditions [22]. This will foster green finances and creditors from investors or garner green commercial credit from suppliers, thereby decreasing financing constraints on green innovations. Concurrently, ESG would help to establish an equitable compensation system by implementing diverse employee stock ownership or incentive measures, allowing employees to share the surplus benefits generated by innovation. These efforts could promote the alignment of interests between employees and companies, elevating the enthusiasm of employees for green innovations [23]. These innovative activities will enhance the efficiency of resource utilization and corporate green competitiveness, producing competitive advantages and improving corporate performance [61,62]. For example, by improving the efficiency of resource usage in product production, the operating profits of companies will indirectly increase [67]. Alternatively, incorporating environmental issues into corporate long-term development strategies would expand product market share, thereby promoting sustainable growth in corporate financial performance. Improving corporate performance can decrease executives’ reliance on investment returns from financial assets, thus inhibiting corporate financialization.

Based on the above analyses, this study offers several hypotheses:

H1: 

The implementation of the YBCD could inhibit corporate financialization.

H2: 

The YBCD could inhibit corporate financialization by reducing corporate agency costs.

H3: 

The YBCD could inhibit corporate financialization by fostering corporate ESG.

3. Methodology and Data

3.1. The DID Model

This study takes the YBCD as a quasi-natural experiment, designating listed companies located in the Yellow River Basin as the treatment group and non-Yellow River Basin listed companies as the control group. The differences-in-differences method is employed to investigate the impact of the YBCD on corporate financialization, following Liu et al. [18].

$${Finratio}_{i,t}={\alpha }_0+{\alpha }_1{DID}_{i,t}+{\alpha }_2\sum _{j=1}^7{Control}_{j,i,t}+Year+Comp+Prov+Indu+{\epsilon }_{i,t}$$

(1)

The independent variable is the dummy variable DID. The Yellow River Basin comprises Qinghai, Sichuan, Gansu, Ningxia, Inner Mongolia, Shanxi, Shaanxi, Henan, and Shandong. Given that the YBCD launched in September 2019, DID takes the value of 1 if companies are located in the YBCD and years after 2019, and 0 otherwise. DID serves as the estimated coefficient, representing the impact of YBCD on corporate financialization.

In this study, corporate financialization is defined as the ratio of financial assets to total assets, calculated as ${Finratio}_{i,t}={FA}_{i,t}/{TA}_{i,t}$ [15]. $FA$ represents the sum of trading financial assets, derivative financial assets, net disbursements and advances, net available-for-sale financial assets, net held-to-maturity investments, and net investment properties. $TA$ signifies the average value of the total assets at the beginning and end of the year. From 2018, accounting standards in China have adjusted the classification of financial assets, with held-to-maturity investments reclassified as bond investments and available-for-sale financial assets reclassified as other debt investments and other equity instrument investments. $FA$ is composed of trading financial assets, derivative financial assets, net disbursements and advances, other debt investments, net investments in other equity instruments, net investments in bonds, and the net amount of investment real estate.

In addition, to examine the impact of the YBCD on the allocation motivation of corporate financial assets, this study categorizes short-term and long-term financial assets based on liquidity characteristics. Short-term financial assets encompass trading financial assets and derivative financial assets, whereas long-term financial assets include net available-for-sale financial assets, net held-to-maturity investments, net long-term equity investments, and net investment properties. Furthermore, long-term financial assets from 2018 to 2022 are defined as debt investments, other debt investments, net long-term equity investments, other equity instrument investments, other non-current financial assets, and net investment properties.

$i$ and $t$ represent companies and times, respectively. $Control$ represents $j$ kinds of control variables. $Year$ and $Comp$ represent year fixed effects and company fixed effects. Given the potential impact of cyclical characteristics within provinces and industries, this study incorporates the time trend terms of $Prov$ and $Indu$. ${\epsilon }_{it}$ represents a random perturbation term. The results of $Treat$ and $Time$ are not presented, as they are absorbed by individual fixed effects and unchanged over time. To avoid the impact of heteroscedasticity and sequence-related issues in the OLS regression process on results, this study adopts robust T-values for the standard errors of estimated coefficients.

Control variables include total asset net profit margin ($ROA$), debt-paying ability ($Lev$), capital intensity ($Fixed$), current ratio ($Liauid$), listing period ($FirmAge$), equity concentration ($TOP$), and company size ($Size$) [16,68]. The variable definitions are shown in

Table 1. Variable definitions.

Variables		Definition
Dependent variable	Finratio	Financial level, Finratioi,t = Financial assetsi,t/Total assetsi,t
	Finasset	Financial level, whether or not to purchase financial assets
Independent variable	DID	The dummy variable for the YBCD. If companies were located in the YBCD after 2019, DID = 1; otherwise, DID = 0.
Control variables	ROA	Return on assets, calculated as net profits/total assets.
	Lev	Leverage, calculated as total liabilities/total assets.
	Fixed	Capital intensity, calculated as fixed assets/total assets.
	Liquid	Current ratio, calculated as liquid assets/liquid liabilities
	FirmAge	Listing period, calculated as the natural logarithm of establishment years
	Top	Ownership concentration, calculated as the shares of the top 3 shareholders/total shares
	Size	Company size, calculated as the the natural logarithm of total assets
	Year	Year dummy variables
	Industry	Industry dummy variables
	Province	Region dummy variables
	Individual	Individual dummy variables

.

3.2. Data Sources

To ensure temporal consistency around the implementation of the YBCD, this study used A-listed companies spanning from 2015 to 2022 as research samples. The time period was based on four years before and after the implementation of the YBCD, combined with the available data. The data processes include (1) excluding the insurance, real estate, and financial industries; (2) excluding ST and *ST companies; and (3) removing samples with missing data. In total, this study formed 28,436 observations, sourced from the China Stock Market & Accounting Research Database (CSMAR). ESG data were generated from the Huazheng ESG rating index. To decrease the impact of outliers on empirical results, this study winsorized the top and bottom 1% of all variables.

Table 2. Descriptive statistics.

Variables	Total (n = 28,436)					YB (n = 4473)		Non-YB (n = 23,963)
	Obs	Mean	S.D.	Min	Max	Mean	S.D.	Mean	S.D.
Finratio	28,436	0.060	0.101	0	0.958	0.047	0.087	0.062	0.103
Finasset	28,436	0.855	0.352	0	1	0.838	0.369	0.859	0.349
DID	28,436	0.088	0.284	0	1	0.562	0.496	0	0
ROA	28,435	0.040	0.072	−0.382	0.255	0.040	0.071	0.040	0.072
Lev	28,436	0.410	0.203	0.052	0.924	0.418	0.205	0.408	0.203
Fixed	28,435	0.196	0.152	0.002	0.714	0.244	0.165	0.187	0.148
Liquid	28,436	2.605	2.539	0.260	18.44	2.351	0.254	2.652	0.586
FirmAge	28,436	2.978	0.299	2.079	3.611	3.008	0.286	2.972	0.301
Top	28,398	0.485	0.153	0.158	0.866	0.476	0.156	0.487	0.152
Size	28,436	22.25	1.307	19.75	26.45	22.356	1.299	22.236	1.308

presents the descriptive statistics for primary variables. The average of corporate financialization is 0.06, with a maximum value of 0.958 and a minimum value of 0, highlighting obvious variations in financial asset holdings across sample periods. In particular, companies located in the Yellow River Basin, comprising 4473 samples, exhibited an average of corporate financialization of 0.047 and variance of 0.087, comparatively lower than the corresponding figures for 23,963 samples outside the Yellow River Basin.

4. Empirical Results

4.1. The Impact of the YBCD on Corporate Financialization

Table 3. The impact of the YBCD on corporate financialization.

Variables	(1)	(2)	(3)	(4)
	Finratio		Finasset
DID	−0.006 *	−0.006 *	−0.022 *	−0.029 **
	(−1.713)	(−1.715)	(−1.897)	(−2.517)
ROA		−0.030 ***		−0.167 ***
		(−3.208)		(−3.989)
Lev		−0.044 ***		−0.190 ***
		(−5.013)		(−7.177)
Fixed		−0.075 ***		−0.243 ***
		(−6.755)		(−8.047)
Liquid		0.000		−0.009 ***
		(0.285)		(−5.145)
FirmAge		0.086 ***		0.074 ***
		(4.106)		(5.752)
Top		−0.038 ***		−0.155 ***
		(−3.068)		(−6.832)
Size		−0.004 **		0.076 ***
		(−2.095)		(22.961)
Constant	0.059 ***	−0.046	0.857 ***	−0.816 ***
	(205.754)	(−0.603)	(223.069)	(−10.518)
Year	Yes	Yes	Yes	Yes
Comp	Yes	Yes	Yes	Yes
Prov	Yes	Yes	Yes	Yes
Indu	Yes	Yes	Yes	Yes
Observations	28,003	27,964	28,436	28,396
R-squared	0.705	0.709	0.026	0.095

Robust t-statistics in parentheses, * p < 0.1, ** p < 0.05, *** p < 0.01.

presents the regression results of the YBCD on corporate financialization. In column (1), the estimated coefficient is statistically significant and negative (−0.006). In column (2), incorporating control variables, the estimated coefficient remains significantly negative. These results confirm that the YBCD could significantly inhibit corporate financialization. Furthermore, the estimated coefficients in columns (3) and (4) remain negative and significant after replacing the dependent variables with $finratio$. These findings provide support for H1.

4.2. Parallel Trend Test

The parallel trend test is a prerequisite for employing the DID model, ensuring no systematic differences in corporate financialization between the treatment group (companies in the Yellow River Basin) and the control group (companies outside the Yellow River Basin). This study adopts the event study method to conduct the parallel trend test presented in Equation (2). $D_{it}$ is a set of dummy variables. If a company $i$ is located in the YBCD and the year is after 2019, $D_{it}$ takes the value of 1; otherwise, it is 0. The coefficient ${\lambda }_t$ captures the difference in corporate financialization within and outside the YBCD in the year $t$. The other symbols are consistent with Equation (1). The policy effect before the implementation of the YBCD is represented by DID_i, while the policy effect after the implementation of the YBCD is represented by DID + i. In order to present these regression results more clearly, this study placed each period separately in

Table 4. Parallel trend test.

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
	Finratio
DID_4	0.003
	(0.371)
DID_3		0.000
		(0.030)
DID_2			−0.004
			(−0.772)
DID_1				−0.018
				(−1.114)
DID + 1					−0.007 *
					(−1.719)
DID + 2						−0.009 ***
						(6.416)
DID + 3							−0.016 ***
							(6.498)
DID + 4								−0.011 ***
								(4.148)
Control	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Year	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Comp	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Prov	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Indu	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Observations	27,964	27,964	27,964	27,964	27,964	27,964	27,964	27,964
R-squared	0.709	0.709	0.709	0.709	0.709	0.709	0.709	0.709

Robust t-statistics in parentheses, * p < 0.1, *** p < 0.01.

. This study incorporates interaction terms multiplied by dummy variables and each year before the implementation of the YBCD in the regression analysis. Table 4 displays the results of the parallel trend test and reveals the absence of significant differences in corporate financialization among companies in and outside the Yellow River Basin before the YBCD. These results satisfy the assumption of a parallel trend. In addition, the estimated coefficients were significantly negative. This suggests that the YBCD can significantly inhibit corporate financialization after policy implementation.

$${Finratio}_{i,t}={\alpha }_0+\sum _{t=-4}^4{\lambda }_t\times D_{it}+{\alpha }_2\sum _{j=1}^7{Control}_{j,i,t}+Year+Comp+Prov+Indu+{\epsilon }_{i,t}$$

(2)

4.3. Robustness Test

4.3.1. Placebo Test

To examine whether corporate financialization is affected by additional factors, this study employed the placebo test, randomly selecting nine provinces as the simulated treatment group. These processes were repeated 500 times to obtain the estimated coefficients and corresponding p-values for simulated policy effects, presented in Figure 1. The results illustrate that the estimated coefficients are generally distributed around the value of 0, with most p-values exceeding 0.1. Notably, the simulated coefficients obtained from the placebo test deviate from the benchmark regression result (depicted by the vertical line). These results suggest that the inhabitation of corporate financialization stems from the YBCD rather than other factors.

4.3.2. Counterfact Test

To exclude potential possibilities that the inhabitation of corporate financialization results from alternative policies, this study set the implementation years of the YBCD as 2017 and 2018. As depicted in columns (1) and (2) of

Table 5. Robustness test.

Variables	(1)	(2)	(3)	(4)
	2017	2018	PSM-DID	Delete 2020
	Finratio
DID			−0.005 *	−0.006 *
			(−1.661)	(−1.814)
DID_2	−0.003
	(−1.083)
DID_1		−0.004
		(−1.315)
Control	Yes	Yes	Yes	Yes
Year	Yes	Yes	Yes	Yes
Comp	Yes	Yes	Yes	Yes
Prov	Yes	Yes	Yes	Yes
Indu	Yes	Yes	Yes	Yes
Observations	27,964	27,964	3484	24,175
R-squared	0.709	0.709	0.788	0.710

Robust t-statistics in parentheses, * p < 0.1.

, when advancing the implementation years, the estimated coefficients lack significance and exhibit inconsistency with the benchmark regression result. This provides additional evidence that the inhabitation of corporate financialization originates from the implementation of the YBCD.

4.3.3. PSM-DID

To decrease the impact of variations in corporate characteristics, this study introduced the propensity score matching method, combined with DID (PSM-DID), to assess the impact of the YBCD on corporate financialization. This study matched companies in the treatment and control groups by year, using all control variables as characteristic indicators [53]. The results post-matching are presented in Table 5 column (3), revealing a significantly negative estimated coefficient. This provides further affirmation of the robustness and reliability of H1.

4.3.4. Adjust Sample Interval

Considering the potential impact of the COVID-19 outbreak on economic activities, this study excluded the data from 2020 and repeated the benchmark regression. The results are presented in column (4) of Table 5, revealing a significantly negative interaction coefficient. This finding underscores the resilience and validity of the benchmark regression result.

5. Further Analysis

5.1. Influencing Mechanisms

5.1.1. Agency Cost

The YBCD would facilitate the oversight of corporate and executive operations and reduce agency conflicts [69], ultimately inhibiting corporate financialization in the Yellow River Basin [16,17,18]. This study used the mediation effect model to examine whether the first type of agency cost serves as the underlying mechanism through which the YBCD could influence corporate financialization, depicted in Equations (2) and (3). The total asset turnover rate ($AT$) serves as the first type of agency cost [70]. The asset turnover cost denotes the agency cost arising from inefficiencies in asset utilization due to executives’ insufficient efforts and decision-making errors. A lower asset turnover rate corresponds to a higher first type of agency cost. The other symbols are consistent with Equation (1). Equations (3) and (4) are established to investigate the impact of the YBCD on the first type of agency costs.

$${AT}_{i,t}={\beta }_0+{\beta }_1{DID}_{i,t}+{\beta }_2\sum _{j=1}^7{Control}_{j,i,t}+Year+Comp+Prov+Indu+{\epsilon }_{i,t}$$

(3)

$${Finratio}_{i,t}={\gamma }_0+{\gamma }_1{AT}_{i,t}+{\gamma }_2\sum _{j=1}^7{Control}_{j,i,t}+Year+Comp+Prov+Indu+{\epsilon }_{i,t}$$

(4)

The result of using the asset turnover rate as a mediation variable is shown in

Table 6. Analyses of the influencing mechanisms.

Variables	(1)	(2)	(3)	(4)
	AT	Finratio	ESG	Finratio
DID	0.019 *	−0.010 ***	0.071 *	−0.006 **
	(1.768)	(−3.916)	(1.883)	(−1.984)
AT		−0.006 *
		(−1.827)
ESG				−0.002 **
				(−2.173)
Control	Yes	Yes	Yes	Yes
Year	Yes	Yes	Yes	Yes
Comp	Yes	Yes	Yes	Yes
Prov	Yes	Yes	Yes	Yes
Indu	Yes	Yes	Yes	Yes
Observations	26,354	26,354	27,344	27,836
R-squared	0.856	0.696	0.596	0.169

Robust t-statistics in parentheses, * p < 0.1, ** p < 0.05, *** p < 0.01.

. In column (1), the estimated coefficient is significantly positive, suggesting that the implementation of the YBCD has increased the asset turnover rate of companies in the Yellow River Basin. In Column (2), $AT$ exhibits a significantly negative impact on corporate financialization. These results reveal a significantly negative correlation between the asset turnover rate and corporate financialization, implying that the YBCD could inhibit corporate financialization by increasing the asset turnover rate, confirming H2.

5.1.2. ESG

The YBCD could enforce environmental management and regulatory policies and foster the construction of companies’ ESG, ultimately increasing profitability and reducing financial asset investments. This section will investigate whether ESG serves as the mechanism through which the YBCD could influence corporate financialization. This study measures the construction of ESG using the Huazheng ESG rating index. A higher ESG rating index indicates a stronger ESG of a company. The other symbols are consistent with Equation (1). Subsequently, Equations (5) and (6) are established to investigate the impact of the YBCD on ESG.

$${ESG}_{i,t}={\eta }_0+{\eta }_1{DID}_{i,t}+{\eta }_2\sum _{j=1}^7{Control}_{j,i,t}+Year+Comp+Prov+Indu+{\epsilon }_{i,t}$$

(5)

$${Finratio}_{i,t}={\theta }_0+{\theta }_1{ESG}_{i,t}+{\theta }_2{DID}_{i,t}+{\theta }_3\sum _{j=1}^7{Control}_{j,i,t}+Year+Indi+Prov+Indu+{\epsilon }_{i,t}$$

(6)

The result of using $ESG$ as a mediation variable is shown in Table 6. In column (3), the estimated coefficient is significantly positive, suggesting that the implementation of the YBCD has promoted corporate ESG in the Yellow River Basin. Column (4) indicates that ESG negatively influences corporate financialization. The estimated coefficient is significantly negative. These results demonstrate a significantly negative correlation between ESG and corporate financialization, indicating that the YBCD could inhibit corporate financialization by fostering ESG, confirming H3.

5.2. Motivation Analysis of Corporate Financialization

Two motivations can drive the financial asset allocation of companies: “reservoir” motivation, which contributes to the development of the physical economy, and “speculative arbitrage” motivation, which hinders the development of the physical economy. The impact of the YBCD on corporate financialization may vary according to these two motivations for financial asset allocation. Due to the “reservoir” motivation, companies will invest financial assets in environmental governance and green innovations, promoting future industrial development and realizing “financial services for the physical economy”. However, companies motivated by “speculative arbitrage” will invest in high-risk and high-yield financial assets, leading to a crowd-out effect on the physical economy and research and development investments, producing negative impacts on physical businesses and sustainable development [71]. Thus, the implementation of the YBCD is more likely to produce negative effects on the “speculative arbitrage” motivation of corporate financialization.

To examine these motivations, this study further divides corporate financialization ($FINRATIO$) into short-term financialization ($SFIN$) and long-term financialization ($LFIN$) due to liquidity characteristics. Short-term financial assets encompass trading financial assets and derivative financial assets, while long-term financial assets comprise net available-for-sale financial assets, net held-to-maturity investments, net long-term equity investments, and net investment properties. Specifically, long-term financial assets from 2018 to 2022 consist of debt investments, other debt investments, net long-term equity investments, other equity instrument investments, other non-current financial assets, and net investment properties. The results presented in

Table 7. Corporate financialization motivations.

Variables	(1)	(2)
	SFIN	LFIN
DID	0.001	−0.007 ***
	(0.881)	(−3.691)
Control	Yes	Yes
Year	Yes	Yes
Comp	Yes	Yes
Prov	Yes	Yes
Indu	Yes	Yes
Observations	26,057	26,057
R-squared	0.539	0.735

Robust t-statistics in parentheses, *** p < 0.01.

indicated that the YBCD could significantly suppress the “speculative arbitrage” motivations of companies. However, the impact of the “reservoir” motivation of companies is not significant. These results suggest that the YBCD would decrease companies’ reliance on financial investment returns, allowing companies to shift from virtual to physical business.

5.3. Heterogeneity Analysis

5.3.1. Property Right Nature

Companies with different property right natures may exhibit varied responses to the YBCD. State-owned enterprises (SOEs), in comparison to non-state-owned enterprises (Non-SOEs), would enjoy distinct advantages in acquiring policy resources, such as fiscal subsidies, tax reductions, and convenient financing. Consequently, SOEs would allocate more resources to ESG. At that time, the YBCD would yield limited impacts on promoting ESG in SOEs, leading to weakened inhibitions on corporate financialization. The ESG of Non-SOEs is inferior to SOEs, and the YBCD would facilitate the enhancement of ESG, ultimately decreasing financial asset investments. Furthermore, SOEs pursue multiple business objectives, encompassing social responsibilities such as ensuring growth, stable employment, and quasi-public goods, crowding out resources for ESG or environmental investments. However, Non-SOEs operate through intense market competition, face stringent environmental requirements, and respond more sensitively and swiftly to the YBCD than SOEs. These attributes could help Non-SOEs to evaluate the opportunities and challenges brought by the YBCD in a timely manner. They can quickly identify new development paths, form advanced development concepts, strengthen ESG, and inhibit corporate financialization. Thus, this study categorizes sample companies based on their property right natures. The results, presented in columns (1) and (2) of

Table 8. The heterogeneity test.

Variables	(1)	(2)	(3)	(4)	(5)	(6)
	SOEs	Non-SOEs	Pollution	Non-Pollution	High Regulation	Low Regulation
DID	0.005	−0.009 **	−0.010 **	−0.002	−0.019 ***	−0.005
	(1.010)	(−2.020)	(−2.476)	(−0.336)	(−2.841)	(−1.385)
Control	Yes	Yes	Yes	Yes	Yes	Yes
Year	Yes	Yes	Yes	Yes	Yes	Yes
Comp	Yes	Yes	Yes	Yes	Yes	Yes
Prov	Yes	Yes	Yes	Yes	Yes	Yes
Indu	Yes	Yes	Yes	Yes	Yes	Yes
Observations	8170	19,736	9081	18,849	21,527	6437
R-squared	0.794	0.696	0.684	0.722	0.721	0.653

Robust t-statistics in parentheses, ** p < 0.05, *** p < 0.01.

, reveal that the estimated coefficient in column (1) is not significant, suggesting that the corporate financialization of non-state-owned companies is not significantly affected by the YBCD. Conversely, the estimated coefficient in column (2) is significantly negative, indicating that the implementation of the YBCD could inhibit the corporate financialization of Non-SOEs.

5.3.2. Pollution Level

The impact of the YBCD on corporate financialization may be related to pollution levels. High-pollution companies, facing serious environmental challenges, are the governance targets of the YBCD. Facing the rigid constraint of an unconditional exit, high-pollution companies choose green transformation to achieve sustainable development. This will result in substantial invests in ESG and green innovation, exerting considerable pressures on financial assets. However, low-pollution companies, which are less affected by environmental governance issues, will experience relatively modest impacts from the YBCD. Hence, drawing from previous studies [72], this study categorizes companies into high-pollution and low-pollution companies based on the median proportion of industry coal consumption in 2015. The results are presented in columns (3) and (4) of Table 8. The estimated coefficient for high-pollution companies is significantly negative, but it is not significant for low-pollution companies. These results indicate that the YBCD could exert greater inhibitory effects on corporate financialization in high-pollution companies than in low-pollution companies.

5.3.3. Government Regulation Heterogeneity

In regions characterized by stronger environmental regulations, business activities would be shaped by the political targets of local governments. The executives of companies confronted with large environmental pressures would significantly enforce the construction of ESG, reducing agency conflicts and inhibiting financial asset investments. This study utilizes the median of environmental punishment cases in provinces to gauge the regulatory levels of local governments [73]. The mean of this indicator served as the benchmark value, divided into high-regulation and low-regulation groups. As depicted in columns (5) and (6) of Table 8, the estimated coefficient exhibits a significantly negative value in regions with higher regulations, whereas it is not significant in regions with lower regulations. This suggests that companies in regions with stronger regulations could generate significant inhibitions on corporate financialization.

6. Discussion

Although many studies have explored the potential impact of regional governance on corporate performances, they are obviously different from this study. Firstly, while some scholars have examined the impact of regional governance on the environmental performance of companies [9,10], there are few studies on corporate financialization. Moreover, those studies mainly focused on relevant policies in the Yangtze River Basin [19,28], while few studies have concentrated on the Yellow River Basin. Considering the importance of green development in the Yellow River Basin and the urgency of companies reducing financial risks, this study examines the impact of the YBCD on corporate financialization. The results indicated that the implementation of the YBCD would inhibit corporate financialization. These findings lie in the uniqueness of specific regions and corporate financialization.

However, this study has two possible limitations. First, the channel through which the YBCD inhibits corporate financialization may be complex. Existing studies have proposed potential mechanisms that may affect corporate financialization, such as agency costs [16,17,18]. Moreover, this study also found that promoting the construction of ESG is another mechanism. Future research could examine the relationship between regional green development and corporate financialization through other possible channels. Second, these findings, based on Chinese data, should be generalized to other countries under different institutional contexts. In addition, the policy period started from 2019, a fairly short period of time; therefore, there may be some deviations in conclusions. Despite these limitations, this study has confirmed the impact of the YBCD on corporate financialization, which offers invaluable references to understand regional green governance and improve asset allocation of companies.

7. Conclusions and Policy Implications

Using A-share listed companies from 2015 to 2022 as the sample, this study employs the YBCD as a quasi-natural experiment to investigate the impact of the YBCD on corporate financialization by the DID method. The research findings indicate that, firstly, the implementation of the YBCD could significantly inhibit corporate financialization and suppress “speculative arbitrage” motivations in financial asset allocation, preventing companies shifting from physical to virtual. These results remain robust after conducting parallel trend tests, placebo tests, counterfactual tests, PSM-DID, and adjusted sample interval. Secondly, the YBCD could inhibit corporate financialization through reducing agency conflicts and fostering the construction of ESG. Thirdly, the heterogeneity analysis reveals that the impact of the YBCD is significant in inhibiting corporate financialization among non-state-owned companies, high-pollution companies, and companies located in stringent environmental regulations.

This study presents the following policy implications. (1) Under the construction of the ecological civilization and high-quality economic development of China, all regions and local governments, especially in the Yellow River Basin, should actively advocate for green development. These regions should emphasize increasing environmental regulations, fostering green market systems, guiding investments in physical businesses, and optimizing asset allocation. Combining with the influencing mechanisms of the YBCD on corporate financialization, reducing agency costs is crucial for the sound growth of companies. Local governments should guide companies and executives towards decreasing financial asset investments, redirecting their attention towards physical businesses and long-term developments. Meanwhile, it is necessary to adopt governmental and market measures to promote corporate green transformation, augment ESG investments, and inhibit corporate financialization. (2) Considering the motivation of holding financial assets, the YBCD would generate notable inhibitions on “arbitrage” motivations. Regional green development strategies should promote “green” and “development” at the same time, ensuring that companies optimize asset allocation structure and foster sustainable development. (3) Addressing the matter of corporate financialization in non-state-owned companies is imperative. The construction of ESG involves resources, subsidies, green credits, market access, and other preferential policies within the regional green development strategy, which should extend benefits not solely to state-owned companies but also encompass non-state-owned companies. This would help non-state-owned companies decrease the stock of financial assets and emphasize the shift toward physical businesses. (4) Intensifying environmental regulations and law enforcement in the Yellow River Basin would constraint companies to forgive short-sighted practices and embrace long-term sustainable development. (5) The economic outcomes triggered by the YBCD would appraise the evaluation of strategic implementation and facilitate governments adjusting measures promptly. These measures would contribute to achieving both environmental governance and economic development in the Yellow River Basin.