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Document Type

Open Access Dissertation

Degree Name

Doctor of Philosophy (PhD)

Degree Program

Economics

Year Degree Awarded

Spring 2014

First Advisor

Peter Skott

Second Advisor

Gerald Epstein

Third Advisor

Donald Tomaskovic-Devey

Subject Categories

Economics | Macroeconomics

Abstract

This dissertation analyzes the financialization of nonfinancial corporations (NFCs), emphasizing changes in firm-level financial behavior in the post-1970 U.S. economy. The dissertation consists of four essays. These essays ask what is the financialization of NFCs, explore why NFCs have ‘financialized’, and evaluate the implications for fixed investment behavior. Chapter 2 lays out a simple stylized framework describing firm-level portfolio choice and utilizes this framework to analyze the implications of increasing NFC involvement in the provision of financial services, increasingly entrenched shareholder value norms, and rising firm-level demand volatility for NFC financial structure. By articulating underlying determinants of firm-level portfolio and financing decisions, this chapter isolates specific features of the post-1970 U.S. economy that can be identified with the ‘financialization’ of nonfinancial corporations, and links these factors to expected changes in financial structure.

Chapter 3 identifies the key phenomena constituting the financialization of NFCs via a detailed decomposition of firm-level balance sheets, thereby addressing the question of what is the financialization of NFCs. Changes in NFC financial behavior are reflected in both an increasing share of – largely liquid – financial assets in firm portfolios, and in changes in the structure of external finance, including increased indebtedness and equity repurchases among large firms. Chapter 4 explores the increasing intertwinement of industry and finance in the case of General Electric, thereby analyzing in more detail the ‘financialization’ of large firms. This case study exemplifies important complementarities and interdependence between the industrial and financial aspects of GE’s business. The shifts in GE’s balance sheet structure towards greater financial asset holdings, increased indebtedness and a reduction in outstanding equity are, furthermore, consistent with GE’s increased emphasis on ‘creating’ shareholder value and engagement in banking activities since the mid-1980s.

Chapter 5 uses a firm-level panel to econometrically analyze the relationship between financialization and fixed investment, exploring the implications of changes in financing behavior, increasingly entrenched shareholder value norms and rising firm-level demand volatility for NFC investment rates between 1971 and 2011. Both shareholder value norms and rising volatility are identified as factors associated with an empirically and economically meaningful decline in NFC investment rates. This analysis also highlights key firm-size differences, building on the discussion in Chapters 3 and 4. In particular, shareholder value norms are found to primarily influence the financial decisions and investment behavior of large firms, whereas rising volatility most substantially impacts small firms.

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