The effects of financialization on investment: evidence from firm-level data for the UK

Abstract

This paper estimates the effects of financialization on physical investment in the UK using panel data based on balance-sheets of publicly listed non-financial companies supplied by Worldscope for the period 1985-2013. We find robust evidence of an adverse effect of not only financial payments (interests and dividends) but also financial incomes on the rate of accumulation. The negative impacts of financial incomes from interests and dividends are particularly strong for the pre-crisis period. Our findings support the 'financialization thesis' that the increasing orientation of the non-financial sector towards financial activities is ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term concerns for productivity.

Financialisation and Real Investment in the European Union: Beneficial or Prejudicial Effects?

“…Orhangazi (2008a and2008b) recognises that this could be a more relevant mechanism in the case of small and medium-sized corporations since they face higher financial constraints and are therefore forced to use all incomes (even financial) to undertake real investments. The same argument is presented by Tori and Onaran (2015), who stress that the effect of financial receipts on investment depends on the NFCs' dimension and/or sector.…”

“…Most of these derive and estimate investment equations that find statistical evidence of the prejudicial effects of the phenomenon on real investment (e.g. Stockhammer, 2004;Orhangazi, 2008a and2008b;van Treeck, 2008;Onaran et al, 2011;Tori and Onaran, 2015; and Barradas and Lagoa, 2017). This paper examines the impact of financialisation on the real investment of NFCs in European Union (EU) countries between 1995 and 2013 inclusive, contributing to the literature in two new ways.…”

“…They found evidence supporting the claims that financialisation (proxied by interest and dividends payments) has suppressed the level of investment. Tori and Onaran (2015) analyse the effect of financialisation on physical investment in the UK, using micro-data at the corporation level from 1985 to 2013. They find evidence supporting the claims that financialisation exerts a negative influence on physical investment through financial receipts and financial payments.…”

Impact on Financialisation on Accumulation: Evidence from India

“…The use of panel data models for firm-specific exploration of the impact of financialisation is common (Orhangazi, 2008;Tori & Onaran, 2018). The panel GMM (generalised method of moments) in Arellano and Bond (1991) is one of the most popularly used for dynamic panels with unobserved heterogeneity.…”

The Effects of Financialisation and Financial Development on Investment: Evidence from Firm-Level Data in Europe

“…Table 2 presents the results based on equations (3) and (4) 22 . With these estimations, we aim at the effect of the development of the financial system on European NFCs' physical 21 For a deeper analysis of the effect of financialization on the UK NFCs' investment, see Tori and Onaran (2015). For additional evidence for the US and emerging economies, see Tori and Onaran (2016).…”