New Research Finds Link Between Corporate Borrowing and Investment Severed as More Money Goes to Shareholders

By Roosevelt Institute |

Post-1980s Shift Toward Payouts Could Weaken Monetary Policy and Hurt the Real Economy
New York, NY: A new white paper released today by the Roosevelt Institute finds that corporate borrowing has become strongly linked to increased shareholder payouts since the 1980s, while the correlation between borrowing and real investment has become much weaker. In the paper, entitled “Disgorge the Cash: The Disconnect Between Corporate Borrowing and Investment,” Roosevelt Institute Fellow J.W. Mason explains that this is a significant departure from postwar corporate spending practices and could be hindering the Federal Reserve’s efforts to stimulate the economy.
“Since the 2008 financial crisis, monetary policy has focused on restoring the health of the financial sector and expanding access to credit in order to boost the economy and create jobs. These findings show that strategy may no longer be as effective as it once was because so much borrowed money is now going to dividends and stock buybacks instead of real investment,” said Mason, an assistant professor of economics at John Jay College, CUNY.
In the 1960s, an additional dollar of earnings or borrowing was associated with
about a 40-cent increase in investment, while no relationship existed between borrowing and shareholder payouts. In recent years, however, a dollar of borrowing has translated to less than 10 cents of additional investment, and a strong relationship has developed between borrowing and payouts. Mason attributes this radical shift to the “shareholder revolution” of the ’80s, which reoriented firms toward maximizing shareholder profits and replaced the postwar system in which managers had broad authority to invest their companies’ money for the long-term.
This paper marks the first major release from the Roosevelt Institute’s Financialization Project, a new multi-year initiative that will explore the series of changes that have occurred in our savings, power, wealth, and society over the past 35 years. Find out more about the project and its forthcoming publications here.
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