Stock Market Concentration, Entrepreneurship, and Economic Growth

Abstract

I examine whether and how concentrated stock markets dominated by a small number of large firms affect economic growth. Using data from 47 countries worldwide during 1989-2013, I show that a country’s stock market concentration is negatively related to capital allocation efficiency, which results in sluggish IPO activity, innovation, and economic growth. These findings suggest that the structure of a concentrated stock market indicates insufficient funds for emerging, innovative firms; discourages entrepreneurship; and is ultimately detrimental to economic growth. My study helps understand the channel through which finance affects growth.