Stock market concentration is stifling economic growth and innovation, according to new research from York University’s Schulich School of Business.
The findings, published in Journal of Financial Economics, found that concentrated stock markets dominated by a small number of powerful firms are associated with less efficient capital allocation, as well as sluggish initial public offerings (IPOs), less innovation activity (as measured by patents), and slower economic growth overall. The study utilized three decades of data from 47 countries.
The research paper, titled “Why is stock market concentration bad for the economy?,” was co-authored by Kee-Hong Bae, professor of finance and Bob Finlayson Chair in International Finance at the Schulich School of Business; Warren Bailey, professor of finance at Cornell University; and Jisok Kang, assistant professor of finance at Boler College of Business at John Carroll University.
“The stock market should fund promising new firms, thereby breeding competition, innovation, and economic growth,” said Bae. “But stock markets dominated by a few large firms are associated with declines in various measures of economic health, including patents, funding for new firms and economic growth.”
Adds Bae: “There is a growing concern among politicians, the media, and academia that the power and concentration of very large successful firms can have troubling consequences. Our findings validate such concern.”