In order to further strengthen the role of financial market in economic development and support the real economy to obtain sustainable competitive advantages, the Chinese government has gradually liberalized and encouraged enterprises into the financial market by means of holding investments in other entities（Li Wei an and Ma Chao, 2014）. In March 2013, the Ministry of Industry and Information Technology, the People’s Bank of China and the China Banking Regulatory Commission, formulated and issued the Action Plan for Strengthening Information Sharing and Promoting the Combination of Industry and Finance, in order to promote stable economic growth and adjust industrial structure. Though the combination of industry and finance becomes a common practice in China, there is no existing literature that systematically investigates how the combination of industry and finance enhances the economic development.
Following the real-options-based framework（Zhang, 2000）, this paper investigates how financial institutions influence enterprises in implementing the call option and the put option and improve the competitiveness of products. We find that when companies have good investment opportunities, financial institutions as the shareholder prompt companies to expand investment in a timely manner. This increases the value of the call option. When companies have less investment opportunities, financial institutions do not have a significant impact on cutting investments. Our findings show that there is asymmetry in the impact of financial institutions on the call and put options. We also find that financial institutions can significantly promote the flow of credit funds from inefficient enterprises to efficient enterprises, which reduces the degree of capital mismatch in the industry. We further examine two important mechanisms by which financial institutions influence corporate investments and product competitiveness, i.e. the “financing facilitation effect” and the “learning effect”, respectively.
The main contributions of this paper are as follows: First, it adopts the real-options-based framework of Zhang（2000）and examines how the combination of industry and finance influences firm value and competitiveness. Second, it reveals the channel mechanism that the combination of industry and finance affects the real economy from the two aspects of “financing facilitation effect” and “learning effect”. Third, by providing the positive impact of the combination of industry and finance in China, it sheds light on how financial institutions improve enterprise competitiveness, mitigate the mismatch of credit funds, and thus support economic growth.