Financialization: Stock Market and Share Buy-back Strategy
What do you understand by the term financialization? What factors are driving US firms to distribute more of their cash to shareholders?
The Bombardment of the psyche of the average citizen by the financial industry in newspapers, magazines, television and the internet offering different financial services from mortgage loans to credit cards brings to mind a question raised by Ismail (2008:1) “ … if finance is everywhere does this mean that we have in some sense become financialized.”
This essay sets out to answer Ismail’s question and give a better understanding of the term financialization. Firstly various view points and opinions of the academia, economic journalist, politicians and analyst in mainstream finance will be reviewed with the aim of examining financialization from their different perspective.
Secondly, the relationship between financialization, shareholder value, fair value accounting, share buy-backs, value creation, value at risk and value absorption will be examined to show how they are all interconnected in the process termed financialization. Further more factors driving the increasing distribution of cash to shareholders by US firms will also be discussed and how all these factors are geared towards achieving one singular goal – the creation of value for the shareholder.
Nolke and Perry (2007) views financialization from two perspective: Profit financialization and Control financialization. Nolke & Perry asserts that Profit financialization is where an organisation makes a greater proportion of its profit from financial activities relative to profit made from its production activities while Control financialization is described as the process by which shareholder value creation is the primary goal of the managers of a firm. Krippner (2005:2) defines financialization as “a pattern of accumulation in which profits accrue primarily through financial channels rather than through commodity production,” this assertion by Krippner further
The Bombardment of the psyche of the average citizen by the financial industry in newspapers, magazines, television and the internet offering different financial services from mortgage loans to credit cards brings to mind a question raised by Ismail (2008:1) “ … if finance is everywhere does this mean that we have in some sense become financialized.”
This essay sets out to answer Ismail’s question and give a better understanding of the term financialization. Firstly various view points and opinions of the academia, economic journalist, politicians and analyst in mainstream finance will be reviewed with the aim of examining financialization from their different perspective.
Secondly, the relationship between financialization, shareholder value, fair value accounting, share buy-backs, value creation, value at risk and value absorption will be examined to show how they are all interconnected in the process termed financialization. Further more factors driving the increasing distribution of cash to shareholders by US firms will also be discussed and how all these factors are geared towards achieving one singular goal – the creation of value for the shareholder.
Nolke and Perry (2007) views financialization from two perspective: Profit financialization and Control financialization. Nolke & Perry asserts that Profit financialization is where an organisation makes a greater proportion of its profit from financial activities relative to profit made from its production activities while Control financialization is described as the process by which shareholder value creation is the primary goal of the managers of a firm. Krippner (2005:2) defines financialization as “a pattern of accumulation in which profits accrue primarily through financial channels rather than through commodity production,” this assertion by Krippner further
References: Ismail E. et al (2008) “Financialization at work : Key Texts and Commentary.” London : Routledge. Krippner, G. R. (2005). “The financialization of the American economy.” Socio-Economic Review, (3) 173-208. Lazonick, W. and O’Sullivan, M. (2000) “Maximizing shareholder value : A new ideology for corporate governance.” Economy and society, 29(1), 13-35 Mitchell, J Nolke, A. and Perry, J. (2007). “The Power of Transnational Private Governance: Financialization and the IASB.” The Journal of Business and Politics, 9(3). Article 4 Stockhammer, E Weston, J. F and Siu, J.A (2003) “Changing motives for Share Repurchases” Working Paper : Anderson Graduate School of Management Finance (University of California, Los Angeles) Paper 303.