Financialization in non-financial companies and financial performance: Does national governance matter?

Purpose The growing reliance of non-financial companies on financial assets, a phenomenon known as financialization, may impact firm’s financial performance by diverting financial resources away from productive investments. Therefore, we investigate the linear and non-linear relationship between non-financial companies’ financialization and financial performance, particularly financial valuation and distress, with a specific focus on the Indian market. Further, we also examine the moderating role of national governance on the relationship between financialization and financial performance. Design/methodology/approach The empirical study uses unbalanced panel data from the BSE 200 index, covering 156 non-financial companies between 2018 and 2024. Data are collected from Bloomberg and the World Bank governance indicators. Panel data regression models with firm- and time-fixed effects are estimated and robust standard errors are applied. In addition, interaction and non-linear specifications are employed to examine the relationships between the variables considered in this study. Findings The findings suggest that the financialization of non-financial companies impacts financial performance negatively, causing a decline in market valuation and exacerbating financial distress. However, robust national governance mitigates the adverse effects of financialization on a firm’s valuation, although its impact on financial stability is limited. The study offers insight into the necessity of a balanced allocation of resources towards operating activities while providing insights into the relationship between financialization, governance and firm-level outcomes. The non-linear model suggests moderate levels of financialization may be neutral or beneficial, but excessive financialization significantly undermines firm value. The findings underscore the importance of effective national governance in mitigating overfinancialization. Research limitations/implications The article informs the research fraternity on the dynamics of financialization. Practical implications For managers, the study provides checkpoints in financialization. To policymakers, it provides insights into the efficacy of robust governance in the market for regulated intervention of the company’s financial activities and promotes productive endeavours. To investors, it guides on the implications of rising financialization in emerging markets. Originality/value The current study provides a fresh perspective on the financialization under the efficacy of national governance in emerging markets.