- New Directions in Modern Economics series
Edited by John Grahl
Chapter 11: The Impact of Financial Change on European Employment Relations
John Grahl ECONOMIC AND IDEOLOGICAL FACTORS AND STANDARDS 11.1 In attempting to assess the impact of financial change on employment relations in Europe, it is necessary to recognize that this change has more than one dimension: clearly there are both economic and ideological aspects to the new salience of security markets and shareholders. Also of great importance is the issue of standards of practice where economic and ideological forces are combined. Finance and Corporate Behaviour The direct economic aspects are related to the constraints and opportunities in the financial environment of an enterprise. From the late 1950s, many mainstream economists thought that financial mechanisms would have little or no impact on corporate behaviour or corporate strategies. This was the implication of the Miller–Modigliani theorem which states that the value of an investment (and by extension, of an enterprise as an assembly of investment projects) is unaffected by the way in which it is financed.1 Were this the case, changes in the system of corporate finance would have no economic impact on employment relations. However, the Miller–Modigliani theorem depends on the absence of asymmetric information. Information may be incomplete without being asymmetric so that investments involve risks but, by assumption, both the suppliers and users of finance assess these risks in the same way. When this assumption is not made, that is, when it is recognized that the enterprise as a user of funds will probably have more information than the suppliers of finance, the result no longer holds....
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