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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 15, No. 2, pp.193-244
ISSN: 1225-0279 (Print)
Print publication date 31 May 2002
Received 29 Aug 2002 Revised 11 Oct 2002

The Effects of Increased Product Market Competition and Changes in Financial Markets on the Performance of Nonfinancial Corporations in the Neoliberal Era

James Crotty
Professor, Department of Economics, University of Massachusetts, Amherst MA 01003, USA, Tel: +1-413-545-2768 crotty@econs.umass.edu

JEL Classifications: F02, G1, G3, L21

Abstract

This paper begins with a summary of arguments in support of the thesis that neoliberal policies have altered the competitive environment within which large nonfinancial corporations operate by slowing global aggregate demand growth and removing national barriers to trade and direct investment. These changes spawned destructive competition in key global industries, leading to low profits, high leverage and chronic excess capacity. It then argues that the evolution of financial markets in the last quarter century has strongly affected nonfinancial corporate structure and performance. Financial market changes led to shorter corporate planning horizons and weaker allegiance of key stakeholders to long-term corporate goals, and they dramatically altered management compensation criteria in ways that aligned top managers' interests with those of institutional investors concerned only with short-term stock price movements. Financial market pressures also led to an enormous increase in the percent of nonfinancial corporations' cash flow disgorged to financial market agents.

Keywords:

Neoliberalism, Financialization, Capital markets, Corporate governance

Acknowledgments

I am grateful to the Political Economy Research Institute at the Department of Economics of the University of Massachusetts, Amherst, for generous research support, to Alper Duman and Ozgur Orhangazi for excellent research assistance, to Bob Pollin for helpful comments, and to Rob Parenteau for help with financial accounting Puzzles.

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