Financial income reallocates resources away from workers and strengthens owner bargaining power

Evidence

The management of trade receivables represents a financial function that was formerly carried out within non-financial firms but is now typically outsourced to specialized financial firms. Trade receivables are short-term credits extended between a firm and its suppliers to facilitate interfirm trade. For example, Firm A purchases machinery from Firm B. Rather than accepting payment for the machinery immediately, Firm B ‘extends’ credit to Firm A for the amount of the sale.In order to make good on this debt,Firm A pays interest—as well as eventually the ‘principal’ on the loan—to Firm B. In the early post-war decades, trade receivables were very often carried on the books of non-financial firms. In more recent years, in contrast, non-financial firms commonly sell their receivables to financial firms that specialize in managing the risks associated with collecting on these debts. This development exerts a downward bias on the first measure—portfolio income—by depriving non-financial firms of a source of interest income. At the same time,the growth of a segment of the financial industry specializing in managing trade receivables generates profits in the financial sector, exerting an upward bias on the second measure of financialization, the ratio of financial to nonfinancial profits. — Greta R. Krippner, The Financialization of the American…, 84 (#exemplifies, via linked claim)

An increase in financial earnings for a nonfinance firm is often interpreted as a success of management in promoting shareholder value. Thus, it is likely to raise the top executives’ bargaining power. That top executives’ incomes are increasingly tied to short-term financial performance and that the stock market now values companies via an examination of returns on capital investment is well known. Compensation schedules for top executives, however, are determined by the boards of directors instead of stock market analysts. Thus, we suspect that, as financialization progresses at the firm level, corporate boards will be converted to the logic of financialization from the earlier logic of maximizing market share in determining CEOs’ and other top executives’ compensation. — Ken-Hou Lin & Donald Tomaskovic-Devey, Financialization and U.S. Income…, 56 (#corroborates, via linked claim)

Whether conceptualized as a new regime of accumulation, a guiding principle of corporate behaviour or a central feature of everyday life, studies of financialization have made several important contributions to the scholarship on contemporary capitalism. Scholars of financialization have questioned some of the fundamental assumptions prevailing in neoclassical economics (the efficient market hypothesis) and Keynesian growth theory (positive relation investment and growth). Instead, they have linked the collapse of the post-war wage compromise and the ascendency of the shareholder value orientation to rising levels of income inequality and financial volatility. — Natascha van der Zwan, Making Sense of Financialization, 109 (#corroborates, via linked claim)

Categorization

• XREF: connects to: Financialization channels income toward the wealthy and depresses productive investment and wages. — Ken-Hou Lin & Donald Tomaskovic-Devey, Financialization and U.S. Income…, 24; Income distributions reflect actors’ relative bargaining and claimsmaking power.; Wage-earners are both workers and capital owners under financialization — Natascha van der Zwan, Making Sense of Financialization, 102 (+13 more)

Related

• Firm financial income diverts resources from core production and shifts bargaining power upward (similarity 0.89)
• Financialization channels income toward the wealthy and depresses productive investment and wages. (similarity 0.84)
• Financialization may be a root cause behind union decline and offshoring (similarity 0.82)
• Financialization theory links wage-compromise collapse and shareholder value to inequality (similarity 0.82)
• Financialization shifts firm investment from core business toward finance, weakening workers’ claims on revenue. (similarity 0.82)
• Financialization drives earnings inequality nearly as much as declining unionization (similarity 0.82)
• Financialization independently explains over half of labor’s falling income share since 1970. (similarity 0.82)
• Outsourcing trade receivables shifts interest income out of nonfinancial firms into the financial sector (similarity 0.82)
• Inequality dimensions reflect one institutional shift toward financialization (similarity 0.81)
• Financial earnings at nonfinance firms raise executive bargaining power with boards. (similarity 0.81)
• Financialization caused most of the decline in labor’s income share since 1970 (similarity 0.81)
• Prior research linked financialization to inequality mostly indirectly, not causally. (similarity 0.81)
• Financialization can be measured by comparing non-financial firms’ portfolio income to their cash flow. (similarity 0.80)
• Financialization does not measurably raise firm profits or financial-asset productivity. (similarity 0.80)
• Financialization may erode the postwar capital-labor social pact (similarity 0.80)

Broader Connections

• Outsourcing trade receivables shifts interest income out of nonfinancial firms into the financial sector #exemplifies (0.85) — Greta R. Krippner, The Financialization of the American…, 84
• Financial earnings at nonfinance firms raise executive bargaining power with boards. #corroborates (0.82) — Ken-Hou Lin & Donald Tomaskovic-Devey, Financialization and U.S. Income…, 56
• Financialization theory links wage-compromise collapse and shareholder value to inequality #corroborates (0.80) — Natascha van der Zwan, Making Sense of Financialization, 109
• Wage-earners are both workers and capital owners under financialization #qualifies (0.75) — Natascha van der Zwan, Making Sense of Financialization, 102
• Financialization drives earnings inequality nearly as much as declining unionization #corroborates (0.75) — Ken-Hou Lin & Donald Tomaskovic-Devey, Financialization and U.S. Income…, 164
• Financialization may erode the postwar capital-labor social pact #corroborates (0.72) — Greta R. Krippner, The Financialization of the American…, 142