The study investigates the complex relationship between corporate financialization and enterprise upgrading, particularly within the context of China's economic transition. Post-subprime crisis economic development has seen a significant shift towards financialization, where companies allocate capital to the financial sector rather than reinvesting in production activities. This trend intensified with the COVID-19 pandemic, creating a development dilemma and hindering enterprise upgrading. The research aims to explore the microeconomic consequences of corporate financialization by examining the impact of financial asset allocation on enterprise upgrading, considering both short-term and long-term financial assets. The study's importance lies in its potential to provide insights for government policies and corporate strategies aimed at promoting sustainable economic growth and alleviating the challenges posed by financialization.

Existing literature on corporate financialization focuses on the "reservoir effect" (financial assets providing liquidity and risk diversification) and the "crowding-out effect" (financial assets diverting capital from physical investment and R&D). While studies have analyzed the influencing factors and macroeconomic consequences of financial asset allocation, research on the meso-level effect on enterprise upgrading, its mechanisms, and heterogeneous effects is limited. Prior research primarily focuses on linear relationships, neglecting the potential for non-linearity. This study addresses this gap by exploring the dual economic consequences of different financial asset allocation motives (cash reserves and capital arbitrage) and their impact on enterprise upgrading.

The study uses financial data from Chinese non-financial A-share listed companies from 2012 to 2021. Data sources include the China Securities Markets and Accounting Research Database, Wind Economic Database, and Juchao Information websites. The sample excludes firms with missing data, accounting insolvency, unusual listing status, or those violating accounting common sense. Data was winsorized at the 1% and 99% levels. The dependent variable is enterprise upgrading, measured using total factor productivity (TFP) calculated via the Olley-Pakes (OP) and Levinsohn-Petrin (LP) methods. Independent variables include financial asset allocation (FIN), categorized into short-term (FIN_S) and long-term (FIN_L) assets, and several control variables (capital structure, cash flow, profitability, capital intensity, asset size, investment opportunities, labor intensity, and firm age). Benchmark regression models (fixed effects models with firm-level clustering) examine the linear and non-linear relationships between financial asset allocation and TFP. Further analysis includes mediating effect tests using risk-taking capacity (RISK) and earnings persistence (EP) as mediating variables, and heterogeneity tests across different firm characteristics (over-indebtedness, ownership type, and financing constraints). Moderating effect tests also examine the impact of capital expenditure (CAP) and financial channel profitability (RF) on the relationship between financial assets and enterprise upgrading.

The study's key findings are: 1. Short-term financial assets (FIN_S) have a positive and significant impact on enterprise upgrading (TEP_OP and TEP_LP). 2. Long-term financial assets (FIN_L) have a negative and significant impact on enterprise upgrading. 3. The overall relationship between financial asset allocation (FIN) and enterprise upgrading is inverted U-shaped, indicating an optimal level of financial asset allocation beyond which further increases hinder upgrading. The inflection points calculated are 0.278 and 0.288 for TEP_OP and TEP_LP respectively. 4. Risk-taking capacity mediates the positive relationship between short-term financial assets and enterprise upgrading. 5. Earnings persistence mediates the negative relationship between long-term financial assets and enterprise upgrading. 6. Heterogeneity tests reveal that the negative impact of excessive financial asset allocation is more pronounced for over-indebted firms, non-state-owned enterprises, and firms with high financing constraints. 7. The moderating effect tests indicate that capital expenditure (CAP) weakens the inverted U-shaped relationship, while financial channel profitability (RF) strengthens it. Robustness checks, including the use of alternative TFP measures, one-period lagged regressions, and the inclusion of province-fixed effects, confirm the main findings.

The findings address the research question by demonstrating the dual and non-linear effects of financial asset allocation on enterprise upgrading. The inverted U-shape highlights the importance of optimal capital allocation, emphasizing the need for a balanced approach that leverages the benefits of short-term liquidity while avoiding over-reliance on long-term financial assets. The mediating effects of risk-taking capacity and earnings persistence shed light on the underlying mechanisms driving the relationship. The heterogeneity analysis underscores the importance of considering firm-specific characteristics when formulating policies to promote enterprise upgrading. The moderating effects of capital expenditure and financial channel profitability suggest the need for comprehensive strategies to optimize resource allocation and control market speculation.

This study makes significant contributions by providing empirical evidence on the dual and non-linear effects of financial asset allocation on enterprise upgrading in China. It highlights the importance of considering short-term versus long-term asset implications, mediating factors, and firm-specific heterogeneity. Policy recommendations include optimizing capital allocation channels, strengthening securities regulations, and expanding financing channels for real assets. Limitations include the focus on China's market, potential refinements to the enterprise upgrading measure, and the sample size. Future research could explore additional mediating variables, conduct cross-national comparisons, and use alternative data sources.

The study's limitations include its focus on the Chinese A-share market, which may limit the generalizability of findings to other contexts. The measure of enterprise upgrading could be further refined, and the sample size could be increased in future studies to enhance statistical power. The study controls for various factors, but unobserved contextual differences might still influence the relationships. Future research should investigate the potential influence of omitted variables.