Financial systems, corporate control and capital accumulation Michel Aglietta and Régis Breton Abstract The rise of nancial markets, backed by the revolution in information technology, has been one of the pillars of the new economy. Asset price ination, nanced by debt, has now become the driving force in capital accumulation and equity-linked markets for corporate control have signicant effects on both corporate strategic management and the growth of the business sector. This paper develops a model to study these relationships. One component of the new circumstances is that an active market for control forces rms to boost their share price in response to the threat of take-over and, to maintain a minimum return on equity, they have to distribute dividends or buy back shares. As a consequence, the share of prots dedicated to nancing inter- nal growth is reduced, corporations increase their indebtedness and thereby become constrained by banks. The interplay of these multi-dimensional pressures delivers a straightforward, but nonetheless important lesson: everything else being equal, the more active the market for control, the lower the growth rate. Keywords: liquidity; market for control; take-over threat; debt limit; share price; default risk. Introduction Since the beginning of the current century, the new economy frenzy has been replaced by the harsh realities of prot and loss. Intellectually, this is a healthy outcome. However, the social consequences of the so-called equity culture, encouraged by the crazed prophecies of nancial analysts and the cynical advice Copyright © 2001 Taylor & Francis Ltd ISSN 0308-5417 print/1469-577 online DOI: 10.1080/03085140120089054 Economy and Society Volume 30 Number 4 November 2001: 433–466 Michel Aglietta, CEPII, 9 rue Georges Pitard, 75015 Paris. E-mail: aglietta@cepii.fr Régis Breton, FORUM, Université de Paris 10 Nanterre, bât. K, 200, avenue de la République, 92 001 Nanterre Cedex. E-mail: regis.breton@u-paris10.fr