Does administrative monopoly regulation restrain enterprise over-financialization? Evidence from China's fair competition review system

This study investigates how government policies affect the market environment and enterprise practices. We conduct a quasi-natural experiment, with a treatment group based on enterprises' investment circumstances to examine the impact of the Fair Competition Review System (FCRS) on enterprise over-financialization. The relevant results are threefold. (1) The FCRS limits excessive cash flow by reducing the bank credit convenience and increasing the capital use cost, thereby lowering the proportion of financial investments. Simultaneously, it enhances production efficiency by stimulating corporate innovation and increasing total factor productivity, thereby promoting real investment. This dual approach effectively channels more capital into the real economy sector, preventing enterprises from becoming overly financialized. (2) The FCRS is more effective at reducing over-financialization in state-owned enterprises, central-western regions, and areas with high market fragmentation. (3) The FCRS effectively reduces over-financialization under government self-review and joint-review regimes, but it is ineffective under third-party review. The combination of government self-review and third-party oversight is a more effective application of FCRS. Although this study concerns China's market and policy environment, policymakers in other countries considering the integration of similar policy instruments within their legal and market frameworks could learn from China's experiences with FCRS implementation to limit enterprise over-financialization and promote real economic growth.