ABSTRACT OF PAPER
Title: Why should we not systematically forget Thorstein Veblen’s analysis of corporate finance?
Author: Dieudonné Marion
At the beginning of the 20th century, great economists in the European tradition explain the link between corporate finance, investment and financial structure. Indeed, the writings of Keynes (1930), Myrdal (1931, 1933) and Tobin (1969) deal with the development of an investment theory based on the financial structure. They contribute to the understanding of the role of financial structure in business management. In this respect, a rather dense secondary literature studies the sources and influences of investment determinants, of assets market movements and their transmission to the real economy in their works. (Schmidt, 1995; de Boyer, 2003; Dimand, 2014). Furthermore, Marx (1894), Hilferding (1910) also contribute to this tradition of thought with their analysis of the evolution of the figure of the entrepreneur. However, these studies do not mention Thorstein Veblen (1904, 1908, 1923), one of the founding fathers of institutionalism, who remains unknown even if a recent literature (Ganley, 2004; Gagnon, 2007; Cochrane, 2011; Mendez, 2012) considers that he provides a real contribution to the capital theory. Indeed, he carries out an American analysis of the corporate governance structure, what appears as a real challenge in the early 20th century in view of the evolution of the financial instruments, of shareholders behavior and of corporate equity valuation concerns. The theory of the non-neutrality of financial structure seems still today a full interesting topic, so that, in this paper, we want to focus on the reasons why we have not to forget Veblen corporate financial analysis. In a first part we are interested in the analysis of the investment as a consequence of a financial assets valuation. Firstly, we retrace the tradition of analysis of the role of the financial structure in business investment between 1898 and 1969, emphasizing the parentage from Knut Wicksell to James Tobin. We present this investment theory through the lens of different Q-theories that literature has identified (Dimand, 2014). We establish a new presentation of the Wickselian and Keynesian theories that appears interesting for understanding the Q-theories. In a second section, we demonstrate that Veblen fits in this analysis of the investment as a consequence of financial assets valuation even if he is a forgotten theoretician in corporate finance. There is a literature studying links between different Q-theories and a quite similar analysis of investment and corporate capital in Veblen’s works (Bolbol & Lovewell, 2001; Medlen, 2003, Dimand, 2004). But, despite all these papers, the link is not established between the veblenian goodwill and the investment windfall profit of Keynes, the Q-Myrdal, the q-Tobin. Consequently we present Veblen as a precursor, since 1904, of the reasoning in terms of company’s capitalization and of analysis of its financial structure. In a second part we show Veblen with his contemporaries and identify that he is a pioneer of managerial capitalism and of financial corporate analysis. In a first section we put to the light the divergence on the consequences of the corporate additional value between Veblen and contributors to the Q-theory. While the latter are developing a theory of investment, Veblen makes an analysis of the financial structure and business management concerns. Therefore, we bring up the Veblen’s relationships and influences with European theorists (Rubel, 1968; Berle and Means, 1932). We insist on the square and the characteristics of the capitalist-entrepreneur and shareholders as well as the use of the credit leverage effect in the manner of Marx and Hilferding. This allows us to state, as emphasized later Berle and Means, the establishment of a link between the separation of ownership from management functions. Moreover, we consider that the company’s performance takes already place at the beginning of the 20th century. In the last section, we make a review of textbooks democratizing this branch of the economy (Ely & Co, 1893, 1919; Dewing, 1919) and we prepare a historical and “institutionalist” analysis to understand the impetus, spurred by Veblen and continued by his contemporaries, in the focus about the structure and the entrepreneurial function. Then, we present Veblen as one of the early contributors to corporate finance.
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