Stock Market Valuation and Output Growth in India

Abstract

The paper examines the relationship between stock market valuation and output growth at the firm level. Specifically, it aims at understanding the impact of firms’ stock market valuation and stock liquidity on the growth of real output. The sample for the study includes panel data of Indian public limited manufacturing firms. The study covers the period from March 2004 to March 2017. Firms with at least two consecutive years of data have been included in the sample. The full sample includes firm-year observations of 877 firms. The finding shows that both stock market valuation and turnover ratio have a significant positive impact on the growth of output, even after controlling for other important determinants of output. Further, both stock market variables and bank credit significantly influence the growth of output. This suggests that banks and stock market provide complementary financial services required for the growth and the development of the stock market will not undermine the role of the institution based financial system.

Keywords: stock market, market Valuation, stock liquidity and output growth

JEL Classification: G1