The effects of financialization on investment: Evidence from firm-level data for the UK

By Daniele Tori, Özlem Onaran

PKES Working Paper 1601

January 2016

This paper estimates the effects of financialization on physical investment in the UK using panel data based on balance-sheets of publicly listed non-financial companies supplied by Worldscope for the period 1985-2013. We find robust evidence of an adverse effect of not only financial payments (interests and dividends) but also financial incomes on the rate of accumulation. The negative impacts of financial incomes from interests and dividends are particularly strong for the pre-crisis period. Our findings support the ‘financialization thesis’ that the increasing orientation of the non-financial sector towards financial activities is ultimately leading to lower physical investment, hence to stagnant or fragile growth, as well as long term concerns for productivity.

Keywords: Financialization, Investment, Non-financial sector, Firm data, United Kingdom

JEL classification: C23 D22 G30