Outsourcing trade receivables shifts interest income out of nonfinancial firms into the financial sector

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

Categorization

• XREF: Connects to the reader’s framing concern in ‘Grafting & Growth’ about infrastructure as underused systems — here outsourcing reshapes where value is captured. — connects to: Stagnating growth plus deregulation pushed firms from production into financial investment — Ken-Hou Lin & Donald Tomaskovic-Devey, Financialization and U.S. Income…, 41; Major nonfinancial corporations shifted their earnings toward financial operations — Ken-Hou Lin & Donald Tomaskovic-Devey, Financialization and U.S. Income…, 45; Financial income reallocates resources away from workers and strengthens owner bargaining power (+6 more)
• DEFINE: Defines trade receivables and explains why their outsourcing biases the two financialization measures in opposite directions.

Related

• Financial income reallocates resources away from workers and strengthens owner bargaining power (similarity 0.82)
• Company-level industry classification can misallocate financial subsidiaries to non-financial sectors. (similarity 0.78)
• Nonfinancial firms’ portfolio income relative to cash flow surged by the late 1980s (similarity 0.78)