Financial innovation, optimal financing structure, an Austrian perspective

A substantial number of studies, reports, and policies—often advocated by financial regulators or think tanks—state that long-term investments in the equity market are underweighted compared to investments in the fixed income market, and that portfolio reallocation towards riskier assets would benefit both investors and firms. Can an optimal financial structure be determined ex-ante at the macroeconomic level? How could financial innovations and the engineering of structured products contribute to the welfare of the economy? While mainstream financial theories provide some (but incomplete) elements of answers, the Austrian school of economics has not yet developed a comprehensive financial theoretical framework to approach these types of questions. This article has three main objectives: firstly, it provides the basis for the development of an authentic Austrian financial theoretical framework, inherited from Austrian capital theory. Secondly, it uses this framework to analyse the economic benefits of financial innovations. Finally, it studies whether there is any theoretical justification and/or empirical evidence to implement public policies to channel saving from fixed income to equity. The approach followed in this article shares some conclusions with mainstream financial theories, but also some key differences. One of the originalities of this article from an Austrian perspective is to integrate an empirical test into the analysis, in the form of a cross-sectional study. This approach may allow mainstream and Austrian economists to mutually enrich and reconcile their theories and methods, in order to reach some consensus concerning different policies and recommendations.