Distortions in the investment system driven by financial markets

Abstract

Over the past few decades, the financial sector in advanced economies has undergone profound changes, and this is particularly true for the US financial economy. This paper focuses on aspects of this evolution that are closely related to distortions in the investment system. The line of thought starts from the maximisation of shareholder value, which was the ideological basis for the split between the real economy and the financial sector. The paper provides a multifaceted analysis of the impact of financial markets on investment behaviour, the decline in real capital investment, the adverse consequences of value extraction, and the adverse effects of share buybacks. As long as the gap between the cost of capital and the minimum expected rate of return is not narrowed, the position of real capital investment will not improve.