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The Big Bang: Stock Market Capitalization in the Long Run

Journal: Journal of Financial Economics

Date: 20220801

Author: Kuvshinov, Dmitry; Zimmermann, Kaspar

Abstract:
We study trends and drivers of long-run stock market growth in 17 advanced economies. Between 1870 and the 1980s, stock market capitalization grew in line with GDP. But over subsequent decades, an unprecedented expansion saw market cap to GDP ratios triple and remain persistently high. While most historical stock market growth was driven by issuances, this recent expansion was fueled by rising equity prices. We show that the key driver of this structural break was a profit shift towards listed firms, with listed firm profit shares in both GDP and capital income doubling to reach their highest levels in 146 years.

Link: Google Scholar

Key Findings

The Big Bang in Stock Markets

Between 1870-1980s, stock market capitalization grew in line with GDP. After 1980s, an unprecedented expansion saw market cap to GDP ratios triple and remain persistently high across 17 advanced economies.

Shift from Issuance to Price Growth

While historical stock market growth was driven by equity issuances, the recent expansion was fueled by rising stock prices, with net issuance actually slowing down after 1985.

Profit Shift to Listed Firms

The key driver was a profit shift towards listed firms, with listed firm profit shares in GDP doubling to reach their highest levels in 146 years, driven by higher profit margins rather than increased market share.

Market Capitalization Growth Components

  • Pre-1985 growth was primarily driven by issuance (3.82% pre-1914, 4.15% 1914-1985)
  • Post-1985 saw significant real capital gains (3.66%) with reduced issuance (2.16%)
  • Total market cap growth accelerated in post-1985 period to 6.64%

Drivers of Market Value Expansion

  • Profit shift alone explains 71% of the market cap increase
  • Discount rate changes account for only 8% of the increase
  • Combined effects explain 94% of the total market cap expansion

Listed Firm Profitability

  • Listed firm dividend to GDP ratio nearly tripled from 1% to 2.8%
  • Increase driven by higher profit margins rather than market share gains
  • Historically unprecedented level of listed firm profitability

Contribution and Implications

  • First comprehensive long-run dataset on stock market capitalization and its drivers across 17 advanced economies from 1870-2016
  • Documents unprecedented structural break in market capitalization growth after 1980s driven by profit redistribution rather than broader economic changes
  • Highlights importance of within-capital-income shifts in shaping distribution of wealth, beyond labor vs capital share debates

Data Sources

  • Market capitalization growth components chart based on Table 1 showing decomposition across different time periods
  • Expansion drivers visualization derived from Table 4 counterfactual analysis of market cap changes
  • Profitability trend based on dividend/GDP ratio data from Tables 3 and 4 and associated text