Productivity Growth and Stock Returns: Firm- and Aggregate-Level Analyses

Abstract

Technological innovation is not always a blessing for all the firms in an economy, or for investors who hold the market portfolio. In the late 20th century US, the market return correlates negatively with aggregate productivity growth, yet individual firms’ stock returns correlate positively with their own productivity growth. This is because most individual firms’ stock returns also correlate negatively with aggregate productivity growth. This seeming fallacy of composition reflects Schumpeterian creative destruction: a small number of technology winners’ stocks rise with their rising productivity and technology losers’ stocks fall with their declining productivity. Analogous reasoning explains prior findings of a negative relationship between the market return and aggregate earnings.

Keywords: Technological Innovation, Stock Return, Heterogeneity, Productivity, Fallacy of Composition

JEL Classification: G12, O33