Abstract
ABSTRACTThis article presents an empirical analysis of the relationship between financialisation and real investment for non-financial corporations using panel data composed of 27 European Union countries over 19 years (1995 to 2013). On the one hand, financialisation leads to a rise in financial investments, diverting funds from real investments (‘crowding out’ effect); on the other, pressures from shareholders to intensify financial payments restrict the funds available for new real investments. We estimate an aggregate investment equation with the traditional variables (lagged investment, profitability, debt, cost of capital, corporate savings and output growth) and two further measures of financialisation (financial receipts and financial payments). The findings demonstrate that financialisation has damaged real investment in European Union countries, mainly through the channel of financial payments, either by interest or dividend payments. It is also found that the prejudicial effects of financialisation on investment were more severe in the pre-2007 crisis period. It is concluded that financialisation contributed to a slowdown of real investment by 1 to 8 per cent in the full and pre-crisis period, respectively. During the pre-crisis period, financialisation was the main driver of the slowdown of investment in the European Union.
Highlights
Conventional economic theory finds that the growth of finance fosters economic growth due to the positive association between savings and investments (e.g. Levine, 2005)
Our variables are defined in ratios or in growth rates; intuitively, it is plausible to assume that these variables do not exhibit a unit root
This paper aimed determining whether financialisation has beneficial or prejudicial effects on real investment in European Union (EU) countries by conducting a panel data econometric analysis for 27 EU countries from 1995 and 2013, using macroeconomic annual data
Summary
Conventional economic theory finds that the growth of finance fosters economic growth due to the positive association between savings and investments (e.g. Levine, 2005). Scholars of financialisation (Orhangazi, 2008a and 2008b; Hein and van Treeck, 2010; Hein, 2012; Hein and Dodig, 2015; among others) postulate that the increasing growth of finance harms the real investment of non-financial corporations (NFCs) through two channels. The first channel involves the NFCs’ greater engagement in financial activities, which tends to divert funds from real investments (‘crowding out’ effect). Some empirical studies have been conducted in recent years to assess the relationship between financialisation and real investment. Most of these derive and estimate investment equations that find statistical evidence of the prejudicial effects of the phenomenon on real investment 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 and 2008b; van Treeck, 2008; Onaran et al, 2011; Tori and Onaran, 2015; and Barradas and Lagoa, 2017)
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