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Financialization and Capital Accumulation in the Nonfinancial Corporate Sector: A Theoretical and Empirical Investigation on the US Economy, 1973-2004

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Orhangazi, Ozgur

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Abstract

Recent research has explored the growing ‘financialization’ process in the U.S. and other advanced economies. The term is a catch-all phrase used to denote important changes in the structure of non-financial corporations’ balance sheets, including the growth of income from financial subsidiaries and investment as well as growth in the transfer of earnings to financial markets in the forms of interest payments, dividend payments and stock buybacks. This paper seeks to empirically explore the relationship between financialization in the U.S economy and real investment at the firm level. Using data from a sample of non-financial corporations from 1973 to 2003, I find a negative relationship between real investment and financialization. First, increased financial investment and increased financial profit opportunities may have crowded out real investment by changing the incentives of firm managers and directing funds away from real investment. Second, increased payments to the financial markets may have impeded real investment by decreasing available internal funds, shortening the planning horizons of the firm management, and increasing uncertainty. These two channels can help explain the negative relationship I find between investment and financialization.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7724.

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Date of creation: 01 Oct 2007
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Handle: RePEc:pra:mprapa:7724

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D2 - Microeconomics - - Production and Organizations
E2 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment

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  6. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Mayer, Colin, 1994. "The Assessment: Money and Banking: Theory and Evidence," Oxford Review of Economic Policy, Oxford University Press, vol. 10(4), pages 1-13, Winter.
  8. Glen, J. & Lee, K. & Singh. A., 2000. "Competition, Corporate Governance and Financing of corporate Growth in Emerging Markets," Accounting and Finance Discussion Papers 00-af46, Faculty of Economics, University of Cambridge. [Downloadable!]
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  10. Robert Townsend, 1979. "Optimal contracts and competitive markets with costly state verification," Staff Report 45, Federal Reserve Bank of Minneapolis. [Downloadable!]
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  12. Gustavo Grullon & Roni Michaely, 2002. "Dividends, Share Repurchases, and the Substitution Hypothesis," Journal of Finance, American Finance Association, vol. 57(4), pages 1649-1684, 08. [Downloadable!] (restricted)
  13. Chirinko, Robert S. & Fazzari, Steven M. & Meyer, Andrew P., 1999. "How responsive is business capital formation to its user cost?: An exploration with micro data," Journal of Public Economics, Elsevier, vol. 74(1), pages 53-80, October. [Downloadable!] (restricted)
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