Stock Prices and Social Wealth

40 Pages Posted: 8 Jan 2001

See all articles by Lynn A. Stout

Lynn A. Stout

Cornell Law School - Jack G. Clarke Business Law Institute (deceased)

Date Written: November 2000


A rise in the price of a company's stock is commonly believed to signal an equivalent rise in both the value of the company and in aggregate social wealth. This belief can be traced to three influential ideas in modern finance: the Efficient Capital Market Hypothesis (ECMH), the Capital Asset Pricing Model (CAPM), and what might be called the principal-agent or shareholder primacy model of the firm. In the decades since these ideas were first developed, scholars have produced an extensive body of theoretical and empirical work that revises, extends, and in some cases challenges them. This article reviews some of that work and concludes that the relationship between stock prices and social wealth is far more indirect and complex than generally understood, even if investors are assumed to be rational. It offers examples of a variety of situations in which stock prices predictably will fail to capture corporate value and suggests a research agenda for developing more accurate means of measuring the corporate sector's capacity to generate social wealth.

JEL Classification: D80, G1, G3, K22

Suggested Citation

Stout, Lynn A., Stock Prices and Social Wealth (November 2000). Harvard Law and Economics Discussion Paper No. 301; Georgetown Law and Economics Research Paper No. 249991. Available at SSRN: or

Lynn A. Stout (Contact Author)

Cornell Law School - Jack G. Clarke Business Law Institute (deceased)

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