Power, Financialization, and Corporate Control: Revisiting the Liberal Market Environment at the Firm-Level

In recent years, economic sociology and political economy have paid significant attention to “varieties of capitalism” (VoC) and financialization. While seldom examined together, those studying financialization and the related process of shareholder-value suggest these processes thrive under liberal-market conditions. Few would dispute this but can there be varying levels of liberalization within a country? If so, will this produce varying degrees of financialization? The VoC literature has said little here and has received criticism for it. On the other hand, many sociologists contend financialization and shareholder-value are highly institutionalized leaving little room for variation.

We seek to answer these questions by illuminating the way financial actors shape market environments and financialization behavior at the firm-level. Theoretically, we adopt a “market as politics” view in which financial actors have divergent corporate interests. This not only includes shareholders and managers but the role commercial banks and bondholders play which is surprisingly neglected in firm-level analysis. These fractionalized elite interests and political contestation create an environment conducive to financialization on one end and patient capital lending on the other.    

These dynamic relationships are tested with longitudinal regression techniques and data culled from Compustat as well as the coding of 1,427 10-K reports. We focus not only on a single country but a particular industry—the U.S. apparel, footwear, and retail sector from 1991 to 2004. This highly competitive industry within the U.S, we maintain, provides an ideal typical case for a liberal market environment. Yet even here we find significant variation in the sample: firms with debt and those with banking relationships are significantly less likely to financialize or engage in shareholder-value tactics suggesting banks have more power over firms that previously acknowledged. Conversely, those issuing debt are afforded the liberal-market to do these same practices. However, this liberal relationship and the financialized opportunities it affords is quickly reversed when firms are financially distressed. Under such conditions, creditors exert strong control over firms.

Our results not only demarcate where we do and do not see financialization they also demonstrate the capacity for patient capital in very liberal market environments. Importantly, it is not shareholders driving this but the varied stakes and clout of creditors.  Thus, our perspective offers a highly nuanced account of liberal market dynamics. More broadly, we join others who question certain VoC tenants regarding finance while advancing new empirical insight to the long-standing interest in corporate control, recent work on financialization, and the institutional foundations of elite power within the private sector.