Research indicates Concentration in Stock Market Stifling Economic Growth
New research published in the Journal of Financial Economics finds that concentrated stock markets dominated by a small number of powerful firms are associated with less efficient capital allocation. The concentration also results in sluggish initial public offerings (IPOs), less innovation activity (as measured by patents), and slower economic growth overall. The study utilized three decades of data from 47 countries.
The research paper, titled “Why is stock market concentration bad for the economy?”, was co-authored by Kee-Hong Bae, Schulich Professor of Finance and Bob Finlayson Chair in International Finance; Warren Bailey, Professor of Finance at Cornell University; and Jisok Kang, Assistant Professor of Finance at Boler College of Business at John Carroll University.
“The stock market should fund promising new firms, thereby breeding competition, innovation, and economic growth,” says Bae. “But stock markets dominated by a few large firms are associated with declines in various measures of economic health, including patents, funding for new firms, and economic growth.”
Adds Bae: “There is a growing concern among politicians, the media, and academia that the power and concentration of very large successful firms can have troubling consequences. Our findings validate such concern.”