Why is Stock Market Concentration Bad for the Economy?

60 Pages Posted: 22 Aug 2020 Last revised: 4 Jan 2021

See all articles by Kee-Hong Bae

Kee-Hong Bae

York University - Schulich School of Business

Warren Bailey

Cornell University; Fudan University - Fanhai International School of Finance and China Institute of Economics and Finance

Jisok Kang

John Carroll University - Department of Economics & Finance

Date Written: December 28, 2020

Abstract

The stock market should fund promising new firms, thereby breeding competition, innovation, and economic growth. However, using three decades of data from 47 countries, we show that concentrated stock markets dominated by a small number of very successful firms are associated with less efficient capital allocation, sluggish initial public offering and innovation activity, and slower economic growth. These findings are robust to alternative sample periods, econometric specifications, and competing explanatory variables. Our evidence is consistent with the paradox that the capital market of a competitive economy can impede the continuing competitiveness of that economy.

Keywords: Stock Market Concentration, Capital Allocation, IPO, Innovation, Economic Growth

JEL Classification: E44, G15, O16

Suggested Citation

Bae, Kee-Hong and Bailey, Warren B. and Kang, Jisok, Why is Stock Market Concentration Bad for the Economy? (December 28, 2020). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3655312 or http://dx.doi.org/10.2139/ssrn.3655312

Kee-Hong Bae (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext) 20248 (Phone)
416-736-5687 (Fax)

Warren B. Bailey

Cornell University ( email )

S. C. Johnson Graduate School of Management
387 Sage Hall
Ithaca, NY 14853-6201
United States
607-255-4627 (Phone)
607-254-4590 (Fax)

HOME PAGE: http://courses.cit.cornell.edu/wbb1/

Fudan University - Fanhai International School of Finance and China Institute of Economics and Finance ( email )

China

Jisok Kang

John Carroll University - Department of Economics & Finance ( email )

University Heights, OH 44118
United States

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