Shareholder Value Orientation Research Articles

Corporate Investment Slowdowns in the Context of Financialization: Firm-level Evidence from Poland

ABSTRACT This paper explores two channels through which financialization affects corporate investments: institutional ownership and shareholder value orientation. Employing the GLMM approach, we analyze firm-level data of companies listed on the Warsaw Stock Exchange and identify a significantly negative relationship between financialization-related factors and fixed investments. Specifically, the results suggest that both institutional investors and profit distribution to shareholders inhibit corporate investments in Poland. Notably, foreign, corporate, and large individual shareholders may also influence investment activity by implementing a shareholder value creation strategy.

Institutional investors and dividend payments: evidence in the oil industry

Abstract The debate over the impacts of shareholder value orientation on corporate management has been more intense with the increasing participation of institutional investors in companies’ ownership structures. In this context, the purpose of this study is to evaluate the influence of institutional investors’ shareholding on the payment of dividends in the oil industry. A regression model was used, estimated with the Generalized Method of Moments. The results indicated that the distribution of dividends is related to the profitability and the leverage of the companies, in addition to the history of distribution to shareholders. In general, the presence of institutional investors did not influence the dividend distribution. However, we observed a large participation of these investors in the ownership structure of companies in the oil and gas sector—the average control of these agents was around 25% in the companies of the sample. This study contributes to the literature regarding the influence of institutional investors on the corporate decisions of nonfinancial companies, being original in the context of the oil industry.

Whose firm? Resilience of the German corporate sector to financialization

Abstract We examine how financialization has progressed in the German nonfinancial corporate sector since the 2000s. Using a sample of firms historically listed in the largest German stock market indices, DAX and MDAX, we not only confirm the rise of international passive asset managers but also find a growing prevalence of controlling business families. Although executive pay increasingly consists of equity grants, indicating growing shareholder value orientation, we do not identify corporate financialization in terms of rising share buybacks and payout rates. Instead, ever larger shares of corporate funds are kept inside firms as retained earnings. While firms in the USA ‘downsize-and-distribute’ under the pressure of institutional investors, we hold that German firms ‘save-and-sit-on-it’. Although shaped by the liberalization of corporate governance regulations, this regime still relies on blockholdings and codetermination, while integrating asset managers as new providers of patient capital.

Financialisation, shareholder value orientation, and the decline of trade union membership in the EU

This article shows that an orientation towards shareholder value and corporate indebtedness at non-financial firms have been negatively associated with union density in the EU over the past 21 years. We argue that the financialisation of non-financial firms makes them prioritise their ‘external (economic) balance’ at the expense of a cooperative ‘internal equilibrium’ model. In other words, corporate financialisation pushes non-financial firms to shift to non-participatory, market-based HR systems that directly undermine the role of trade unions. This study examines this corporate financialisation-induced shift within the EU in the wake of deeper economic integration since 1999 and provides panel data econometric evidence that it has significantly undermined union membership.

The effectiveness and risks of expansive monetary policy under financialization

This paper incorporates low interest rates into a framework of post Keynesian theory of the firm under financialization and uses Compustat data to provide an empirical analysis of firm behavior in the eurozone for the period 2000–2018. It reasons that expansive monetary policy targeting low interest rates will only be effective in promoting investment in a scenario where shareholder value orientation (SVO) tightens the finance constraint on growth-maximizing managers. In contrast, when shareholder value maximization becomes the goal of the firm, expansive monetary policy may not only be ineffective in promoting growth but might actually be dangerous because it fosters financial fragility and promotes SVO. Data suggest that financialization in the eurozone represents a shift in the objectives of the firm toward maximizing free cash flows. However, there is no evidence that expansive monetary policy fostered leverage and an equity reduction in the eurozone. Still, the analysis shows that low interest rates were largely ineffective in fostering investment during the period 2008–2018. Therefore, monetary policy seems insufficient to promote investment and growth. Both expansionary fiscal policy and legal reforms that control shareholder power are needed.

Friend or foe? The link between agency cost and financialization in Turkey

AbstractThis study aims to investigate the link between agency cost and financialization in the Turkish manufacturing sector in the period of 1990–2017 with a novel empirical methodology. A two‐step approach has been developed to examine financialization's effect on shareholder value orientation through agency costs. The first step employs a panel stochastic frontier analysis for measuring corporate efficiency, which is an inverse proxy of agency cost. In the second step, the link between financialization and corporate efficiency is investigated using panel data econometric models. The results show that agency cost leads the firms to use financialization instead of real investments.

Disclosure of value-based performance measures: evidence from German listed firms

We examine the determinants of the disclosure of value-based (VB) performance measures in Germany. We argue that firms are more likely to disclose VB performance measures when information asymmetry is greater, as greater information asymmetry means firms have a greater need to credibly signal a shareholder value orientation. Using a hand-collected dataset of German listed firms covering 1,528 firm-years from 2004 to 2011, we demonstrate that firms are more likely to disclose a VB performance measure if the free float is larger than the blocking minority and also, when firms are large, if they have high foreign sales to total sales ratios and are not cross-listed internationally. Our results indicate that German firms use VB performance measures to improve investor communication and to substantiate their shareholder value orientation. Our results should be interpreted against a background of increased shareholder value orientation and sophisticated cost accounting in German firms.

Shareholder payouts across time and space: an internationally comparative and cross-sectoral analysis of corporate financialisation

ABSTRACT Shareholder value orientation has commonly been considered a hallmark of corporate financialisation. Today, firms increasingly share their profits with shareholders in the form of cash dividends and share buybacks. Yet how the shareholder payouts are distributed by firms from various sectors, sizes and countries remain unexplored. To complement existing accumulation- and asset-centred approaches that focus, respectively, on how resources enter the firm and change its structure, we present a payouts-centred approach to corporate financialisation that focuses on how resources leave the firm. This paper analyses firm-level trends in shareholder payouts in OECD member countries for the period 2000–2019, differentiating between types of distributed payouts. We show that shareholder payouts are high across various sectors and geographical locations, and not limited to a small subset of large, US-American financial corporations, but include ‘big pharma’ and ‘big tech’ as well as Latin American and Israeli firms. The paper sheds light on the nature of the contemporary corporations and contributes to discussions on the increasing financialisation of non-financial firms and their rising shareholder value orientation.

Stock market reactions to downsizing announcements: an analysis through an institutional lens

Abstract In this study, we examine stock market reactions to corporate downsizing using a neo-institutional perspective. Over the course of the 1990s, a time period in which shareholder value orientation gained momentum, downsizing became an institutionalized management practice. We argue and propose that the growing legitimacy of this practice is displayed in investors’ reactions to downsizing announcements. Using a sample of 391 downsizing announcements of the S&P 100 firms for the period 1990–2006, we show that the announcement year has a positive (diminishing) effect on the abnormal stock market return and that prior downsizings in the focal firm’s institutional field have a positive linear impact on abnormal stock market return. In addition, we provide evidence that these relationships are positively moderated by proactive downsizing motives and firm size. Our results contribute to a deeper understanding of the performance effects of corporate downsizing and investors’ role in legitimizing this prevalent business practice.

The financialization of non-financial firms: The case of South Korea, 1997–2015

Sociologists have been investigating financialization over the past two decades. Shareholder value orientation has been named as one of the central driving forces for financialization in the US. However, financialization also takes place in countries that do not have a strong shareholder value orientation. What drives financialization in these countries? In this article the authors analyze data for Korea, where the power of shareholders is particularly subdued, and present two findings. First, financialization is an unintended consequence of the state’s pressure on family-owned conglomerates to comply with the Western standard imposed by the IMF during the economic crisis. In the absence of strong shareholders, it was the interplay between the state’s demand to modernize corporate funding practices and the conglomerates’ apparent compliance while minimizing their financial liability. Second, the authors investigate the role powerful unions have in financialization. Previous studies have theorized that unions would have negative effects on financialization, only to come up with mixed results. Using Korean data, this article reveals that in a setting where the political and organizational power of unions is strong, unions have clear negative effects on financialization. The authors suggest that the standard story of financialization, according to which the mighty shareholders push firms to pursue short-term profit, is only one of many possible paths toward it.

Unpacking the dynamics of a contested practice: the case of executive compensation and the shareholder value orientation in the USA

AbstractThe corporate scandals and market crashes of the 2000s generated significant criticism of the shareholder value orientation (SVO) in the USA. We offer a sociopolitical analysis of how this criticism triggered changes in stock-based executive compensation, a central practice associated with the SVO. We first analyze how corporate stakeholders redefined different forms of stock-based compensation, motivated new regulations and wielded direct challenges to specific firms. We then predict how firm-specific differences in external challenges and intra-firm power relationships were related to changes in the use of stock options and restricted stock grants (RSGs), testing our predictions using a longitudinal dataset of S&P 500 executives between 2002 and 2012. We find that firms facing negative media coverage of their executive compensation practices made less use of both forms of stock-based compensation, while firms facing shareholder activism only made less use of stock options, the form that was more heavily criticized. In addition, firms with more powerful CEOs utilized RSGs more heavily and did so even when facing media criticism. Our findings demonstrate that while stock options were vulnerable to change, stock-based compensation remained resilient because the structural power of CEOs, a core corporate governance feature of the SVO, also remained resilient.

NEGATIVE EXTERNALITIES OF SHAREHOLDER VALUE ORIENTATION AND ITS IMPACT ON GLOBAL FINANCIALIZATION

Value-based management (VBM), also often known as and connected to shareholder value (SHV), is the most popular management paradigm of the 21st century. This concept, despite bringing many improvements to companies, has opened the door to a discussion of its negative overall economic effects, especially regarding its impact on the strengthening of the financial sector. The main hypothesis states that SHV orientation is a financialization accelerator – it contributes to the increase in the size and importance of a country’s financial sector relative to other parts of the economy. The study was based on a comprehensive analysis of the literature on the subject. The research method involves a theory-synthesis and general desk research, based on integrative review. Performed studies confirmed the main hypothesis and reveal that an SHV mindset contributes to the increase of global financialization. It is caused, among others, by reinterpretation of the original assumptions, which has paved the way for further, unsustainable corporate practices.

Moral disengagement and moral judgment: the roles of moral endorsement, shareholder-value orientation, and intensity of moral issues

ABSTRACT Previous research demonstrates the critical role moral disengagement plays in unethical decision-making. This study investigates the relationships among moral endorsement, shareholder-value orientation, moral disengagement, and moral judgment on issues of different moral intensities. The results of a scenario-based survey conducted in China confirm the negative (positive) impact of moral disengagement (moral intensity) on moral judgment. The findings reveal that both moral endorsement and shareholder-value orientation of decision-makers significantly influence moral judgment and that moral intensity moderates the relationships between moral endorsement and moral judgment, and between shareholder-value orientation and moral disengagement. The study’s theoretical contributions, managerial implications, and limitations are discussed.

External Earning Pressure，Diversified Equity Investment and Firm Financialization

In recent years, financialization appears in Chinese firms to inspire financial investment to exclude real ones, which also exists in the United States and other nations. As the microcosmic basis of financialization, the phenomenon of firm financialization whether exists and its causes have attracted wide attention of scholars. Previous research in firm financialization focuses on macroeconomic factors like monetary policies; therefore, it attributes financialization to general investment decisions in firms which are affected by macroeconomic background. However, research in internal factors especially in corporate governance has been ignored to some extent. Because of the complex background of financialization, the impact of internal governance factors on firm financialization is also in urgent need of effective analyses, and then effective supervision and policy guidance are generated to avoid potential risks of the real economy. This paper firstly uses a modified empirical model in measuring idiosyncratic effects on firm financialization from corporate governance. In this model, inefficient investment is settled as the object instead of total investment in order to measure idiosyncratic motivations in financialization, and then we use the PSM method to balance the effects from irrational factors in firms’ investment decisions. On this basis, we carry out an empirical analysis in using semi-annual data of listed companies in China from 2007 to 2016. We firstly measure excluding effects in real investment from financialization under the background of corporate governance, which carries out both at the parent firm level and conglomerate level to obtain comprehensive results. Then we measure the impact from external earning pressure and diversified equity investment on excluding effects to analyze impressions from internal shareholders and external ones. It comes to the following conclusions: First, On the basis of excluding irrational investment decision-making, firm financialization represented by financial investment returns and holding equity of financial institutions has produced significant excluding effects of real investment. Second, external earning pressure strengthens excluding effects to some extent. Third, the impact of diversified equity investment on financialization shows two-sided effects: one is to strengthen excluding effects at the parent firm level, while the other is to reduce the effects at the conglomerate level. The conclusions of this paper indicate that the shareholder value orientation in Chinese firms essentially strengthens excluding effects from financialization both in internal and external paths. On the one hand, financialization effects are relieved while the equity investment of parent firms weakens total shareholder values; on the other hand, outside shareholder values strengthen financialization effects by earning pressure from external capital markets. In short, this paper expands the existing research from the following two aspects. First, it provides new paths in analyzing how the shareholder value orientation influence financialization effects, which strengthens the financialization theory. Second, this paper also constructs an empirical model for measuring the impact of corporate heterogeneity on financialization, which provides a certain basis for the follow-up study of firm financialization in the micro-field.

Financialization and Neoliberalism and the Fall in the Labor Share: A Panel Data Econometric Analysis for the European Union Countries

This paper conducts an empirical analysis of the relationship between financialization and neoliberalism and the labor share using panel data composed of twenty-seven European Union countries over nineteen years (from 1995 to 2013). Adopting a Kaleckian perspective, framed in the post-Keynesian literature, financialization and neoliberalism exert a negative influence on the labor share through three different channels: the change in the sectorial composition of economies (the increasing importance of financial activity and the decreasing importance of general government activity), the proliferation of shareholder value orientation, and the deterioration of general workers’ bargaining power. We estimate a labor share equation with the traditional variables (lagged labor share, technological progress, globalization, education, and output growth) and four further measures of financialization and neoliberalism (financial activity, general government activity, shareholder value orientation, and the trade union density rate). The findings show a disruptive relationship between financialization and neoliberalism and the labor share in European Union countries, mainly through the channels of general government activity and shareholder value orientation. It is also found that financialization and neoliberalism have contributed to a fall in the labor share in European Union countries. The technological progress was the main driver of the fall in the labor share in European Union countries, while the output growth was the main supporter. This suggests that the trend of decline in the labor share could intensify in the future taking into account the fears of potential secular stagnation in the current era of financialization and neoliberalism. JEL Classification: C23, D33, E25, E44

OUP accepted manuscript

It is frequently asserted that financialisation has contributed to the decline in the wage share. This paper provides a theoretical clarification and a systematic empirical investigation. We identify four channels through which financialisation can affect the wage share: (1) enhanced exit options of firms; (2) rising price mark-ups due to financial overhead costs for businesses; (3) increased competition on capital markets and shareholder value orientation; and (4) the role of household debt in increasing workers’ financial vulnerability and undermining their class consciousness. The paper compiles a comprehensive set of empirical measures of financialisation and uses it to test these hypotheses with a panel regression of 14 OECD countries over the 1992-2014 period. We find strong evidence for negative effects of financial liberalisation and financial payments of non-financial corporations on the wage share that are in the same order of magnitude as the effects of globalisation.

THE MACROECONOMICS OF SHADOW BANKING

We propose a simple short-run Post-Keynesian model in which the key aspects of shadow banking, namely securitization and the production of structured finance instruments, are explicitly formalized. To the best of our knowledge, this is the first attempt to broaden purely real-side Post-Keynesian models and their traditional focus on shareholder-value orientation, the financialization of non-financial firms, and the profit-led vs. wage-led dichotomy. We rather put emphasis on the role of financial institutions and rentier-friendly environment in determining the predominance of specific growth and distribution regimes. First, we illustrate the macroeconomic rationale of shadow banking practices. We show how, before the 2007–08 crisis, securitization and shadow banking allowed for an increase in profitability for the whole financial sector, while apparently keeping leverage under control. Second, we define a variety of shadow-banking-led regimes in terms of economic activity, productive capital accumulation, and income distribution.

Have we been here before? Phases of financialization within the twentieth century in the US

This paper explores the process of financialization from a historical perspective during the course of the twentieth century. We identify four phases of financialization: the first from the 1900s to 1933 (early financialization), the second from 1933 to 1940 (transitory phase), the third between 1945 and 1973 (de-financialization), and the fourth period picks up from the early 1970s and leads to the Great Recession (complex financialization). Our findings indicate that the main features of the current phase of financialization were already in place in the first period. We closely examine institutions within these distinct financial regimes and focus on the relative size of the financial sector, the respective regulation regime of each period, the intensity of the shareholder value orientation, as well as the level of financial innovations implemented. Although financialization is a recent term, the process is far from novel. We conclude that its effects can be studied better with reference to economic history.

FINANCIALIZATION AND INVESTMENT: A SURVEY OF THE EMPIRICAL LITERATURE

AbstractAn expanding literature analyses the implications of the post‐1980 expansion of finance in advanced economies – a process summarized as ‘financialization’ – for capital accumulation. This paper surveys the empirical literature on financialization and investment to take stock of where we are and to identify questions for further research. Because ‘financialization’ is widely recognized to be ambiguously defined, I first introduce empirical indicators of financialization in this literature. This categorization elucidates three approaches to measuring financialization in the context of investment. The first two approaches emphasize rising income flows between nonfinancial corporations (NFCs) and finance: first, growth in NFCs’ financial incomes and, second, growth in NFCs’ payments to creditors and shareholders. Rising financial profits are, notably, widely used to suggest financial assets and incomes ‘crowd out’ physical investment. I contend that these flow‐based indicators of financialization capture important relationships between changes in firm financial behaviour and investment, but also raise questions about determinants underlying NFCs’ changing portfolio and financing decisions. The third approach to defining financialization emphasizes the best‐developed behavioural explanation linking financialization to reduced investment: shareholder value orientation. In future research, scope remains for further attention to behavioural drivers of the empirical trends summarizing financialization.

Inequality, financialization, and economic decline

ABSTRACTThe objective of this article is to argue that the labor productivity slowdown experienced in recent years by several advanced countries can be explained, following a Kaldorian-Classical approach, by a weak gross domestic product (GDP) performance and by a decline in the wage share. Moreover, drawing inspiration from recent post Keynesian literature, the authors identify the ongoing worsening in income equality and the increase in the degree of financialization as other major explanatory factors of sluggish productivity. The article will provide a brief literature review concerning nonmainstream attempts to endogenize labor productivity, beginning from the famous Verdoorn-Kaldor law (Verdoorn, 1949) and the Kaldor technical progress function (Kaldor, 1961) and including Sylos Labini’s productivity equation (Sylos Labini, 1984, 1999). The authors will then discuss how labor flexibility and shareholder value orientation, one of the main aspects of financialization, can negatively affect equality and labor productivity. Finally, they propose an extended version of the Sylos Labini’s equation, where productivity growth is claimed to depend positively on GDP rate of growth and the wage share, and negatively on income inequality and financialization. They submit to empirical scrutiny their extended productivity equation; the results of their estimations provide support to their theoretical argument.