Industrial stagnation and the financialization of nonfinancial corporations

In this paper, we analyze the relationship between industrial stagnation in the US economy and the financialization of nonfinancial firms by asking whether firms in industries experiencing a stronger post-1970 tendency towards stagnation allocate more funds to shareholder payouts and, specifically, share repurchases. While strands of the literature on financialization have long-emphasized the role of stagnation in driving financialization, fewer papers have considered this hypothesis empirically. Our paper speaks to this space in the literature, by linking industrial stagnation in capital accumulation to a firm’s decision to financialize. We, first, use firm-level data to construct an empirical measure of industrial stagnation. Drawing on insights from the Monopoly Capital School, we measure stagnation using the Baran ratio — which describes the average share of surplus allocated towards investment within an industry — and show a secular decline in the average Baran ratio since 1980. Second, we analyze if the tendency towards stagnation captured by the declining Baran ratio predicts the likelihood and magnitude of a firm’s shareholder payouts. We show that firms in industries with a stronger stagnation tendency (a lower Baran ratio) are more likely to repurchase stock and, among firms that do repurchase, that a lower Baran ratio predicts a higher magnitude of these shareholder payouts. These results suggest that a slowdown on the nonfinancial side of the economy is one factor underlying financialized firm behavior in the post-1980 USA.