Does the Stock Market Benefit the Economy?

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, less informative stock prices, sluggish IPO and innovation activity, and slower economic growth. Our findings are robust to alternative sample periods, econometric specifications, and competing explanatory variables. They illustrate the paradox that the capital market of a competitive economy can impede the continuing competitiveness of that economy.