Quantifying and Understanding the Role of Financialization in the Modern Economy

Important results from the project

The project aims to quantify the concept of financialization -- a broad range of patterns related to a rising importance of finance in the economy in general, and corporate life in particular. Our aim was to investigate if financialization in the U.S. corporate sector has increased over the recent decades, a common claim. We collected annual reports text data and employ machine learning algorithms to classify texts based on topics. The resulting data was used to assess the existence of financialization, its extent and growth.

Expected long term effects

We have verified the usefulness of our text-based variables by correlating these variables with accounting data. For example, as expected, we observe that firms with higher text-based financialization scores tend have higher leverage and are more likely to be dividend-payers, for example. We do not find that the level of financialization of US corporations has increased over the years.

Approach and implementation

Our data consists of archival documents of U.S. firms’ annual reports, dating back to the 1970s. After making the documents machine-readable, we analyzed sections of the annual reports that contained information about corporate strategies, which we classified into categories such as ‘finance-oriented’, ‘customer-oriented’, etc. For the data cleaning and empirical analysis, we used recent machine learning methods applied to text data.