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Does the stock market benefit the economy?

A research project carried out by a Research Associate at the Cambridge Centre for Finance (CCFin), Jisok Kang, and his co-author, Kee-Hong Bae, suggests evidence that a functionally efficient stock market do promote economic growth.

Stock market price display

Dr Jisok Kang
Dr Jisok Kang

Finance researchers have extensively investigated the role of stock market on real economic sector. For instance, whether well-functioning stock markets promote economic growth has received a great deal of attention from academics and policy makers. However, how to measure the functionality of stock markets has been a big empirical challenge. Researchers so far have typically used size measures (e.g. total stock market capitalisation) as a proxy for stock market functionality and not found robust evidence to suggest that stock market development is associated with future economic growth.

The research proposes a new measure of functional efficiency of stock market: stock market concentration. It has shown that concentrated stock markets dominated by a small number of large firms negatively affect economic growth; in countries with concentrated stock markets, capital is allocated inefficiently, which results in sluggish IPO activity, innovation, and economic growth. These findings suggest that a concentrated stock market offers insufficient funds for emerging, innovative firms; discourages entrepreneurship; and is ultimately detrimental to economic growth.