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.
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.