Chapter 5: Financial Markets and NFCs: A Theoretical Discussion
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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