Financialization: Stock Market and Share Buy-back Strategy

1418 words 6 pages
What do you understand by the term financialization? What factors are driving US firms to distribute more of their cash to shareholders?

The Bombardment of the psyche of the average citizen by the financial industry in newspapers, magazines, television and the internet offering different financial services from mortgage loans to credit cards brings to mind a question raised by Ismail (2008:1) “ … if finance is everywhere does this mean that we have in some sense become financialized.”
This essay sets out to answer Ismail’s question and give a better understanding of the term financialization. Firstly various view points and opinions of the academia, economic journalist, politicians and analyst in mainstream finance will be reviewed
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Information signaling on the other hand suggests an attempt by the firm to prevent unusual movement of its share price, share buy back strategy is then employed which increases its EPS leading to an increase in its share price. When a firm intends to increase the shareholder of some existing shareholders a share buy-back strategy is employed this is usually referred to as the wealth transfer motive.

Some firms employ the share buy-back strategy when certain conditions either in the market or economy or new legislation by government brings about a justification for such a change, this is called the miscellaneous motive.

Weston & Siu (2003) Suggests that share buy-backs are also used to address agency problem of mangers investing in non productive projects. Weston & Siu are of the opinion that firms use buy-backs to return excess cash to shareholders to avoid investing in projects with negative net present value.

In conclusion the long term effects of financialization are at best unknown, the reduction of a firms capital which firm justify with increased EPS and an increase in shareholder value may come to a head during a period of persistent losses by the firm where such losses have to be written off against non existent capital of the firm which has been traded away all to create shareholder value. Secondly as Lazonic and O’Sullivan (2000) pointed out firms disgorging all their excess cash to shareholders all in the name of