20 Pages Posted: 27 Feb 2005
Date Written: November 1, 2004
It is widely believed that economic growth is good for stockholders. However, the cross-country correlation of real stock returns and per capita GDP growth over 1900-2002 is negative. Economic growth occurs from high personal savings rates and increased labor force participation, and from technological change. If increases in capital and labor inputs go into new corporations, these do not boost the present value of dividends on existing corporations. Technological change does not increase profits unless firms have lasting monopolies, a condition that rarely occurs. Countries with high growth potential do not offer good equity investment opportunities unless valuations are low.
Keywords: Economic Growth, Equity Premium Puzzle
JEL Classification: E44, F30, G15, N14, O16, O33, O40
Suggested Citation: Suggested Citation
By Ivo Welch