Financialization and the US Economy

Financialization and the US Economy

New Directions in Modern Economics series

Özgür Orhangazi

Özgür Orhangazi brings together a comprehensive analysis of financialization in the US economy that encompasses the historical, theoretical, and empirical sides of the issues. He explores the origins and consequences of the dramatic rise of financial markets in the US economy and focuses on the impacts of this process of ‘financialization’ on the operations of the non-financial corporate sector.

Chapter 5: Financial Markets and NFCs: A Theoretical Discussion

Özgür Orhangazi

Subjects: economics and finance, financial economics and regulation, political economy, politics and public policy, political economy


Financialization, most broadly understood, refers to the increase in the size and significance of financial markets and financial institutions in the modern macroeconomy. There is certainly strong evidence to suggest that the relationship between the nonfinancial corporate sector and financial markets has become deeper and more complex in the process. We now know that over the last 20 years or so, NFCs in the US have been increasingly involved in investment in financial assets and financial subsidiaries and have derived an increasing share of their income from them. At the same time, there has been an increase in financial market pressures on NFCs. This has in part been due to changes in corporate governance, starting with the hostile takeover movement of the 1980s and proceeding to the so-called shareholder revolution of the 1990s (Lowenstein 2004). The same period has therefore also witnessed an increasing transfer of earnings from NFCs to financial markets in the forms of interest payments, dividend payments and stock buybacks. These developments reflect a change in the objectives of top management, an increasing propensity to short-termism in firm decision-making and/or increases in the cost of capital. In the remainder of this study, I analyse changes that have taken place in the relationship between the nonfinancial corporate sector and financial markets and in particular, I ask the question of how financialization affects capital accumulation in the nonfinancial corporate sector. First, I discuss the changing nature of flows between financial markets and the...

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