Why is Stock Market Concentration Bad for the Economy?
60 Pages Posted: 22 Aug 2020 Last revised: 24 Jan 2022
Date Written: December 28, 2020
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: Suggested Citation