Working Paper No. 1298

Should We Worry about the Decline of the Public Corporation? A Brief Survey of the Economics and External Effects of the Stock Market

Published: June 28, 2019Pages: 36Keywords: External effects; Growth; Productivity, Real effects; Stock marketJEL-codes: G10; G30; L10; L50

Should We Worry about the Decline of the Public Corporation? A Brief Survey of the Economics and External Effects of the Stock Market Nikita Koptyug, Lars Persson and Joacim Tåg


In recent years, the number of listed companies has been declining in many countries across the world. This paper provides a selective survey of the literature on the real economic effects of the stock market to assess the potential effects of this decline and determine whether it is likely to continue. The leading economic role of the stock market’s primary market, in which firms raise capital by issuing new shares, is to help growing firms secure financing. We discuss providing and certifying information, coordinating investors, and easing the redeployment of capital as the means through which capital allocation can be achieved efficiently.

The main economic role of the stock market’s secondary market, the trade in existing shares, is to provide liquidity to shareholders, to aid in price discovery, and to provide diversification opportunities. Positive external effects from an active stock market may arise on consumers, labour and private firm due to increased corporate investment, more social responsible business strategies and a more positive business climate. Negative external effects on capital allocation and productivity can arise from short-termism, market mispricing, and increased cross-ownership. Local stock markets can spur innovation and foreign direct investment (FDI) and reduce the risk of early cross-border acquisitions.

Given the myriad of useful economic functions the stock market performs, a future entirely absent of public companies is difficult to imagine and the decline is therefore likely at some point to come to an end. Whether we need to worry about the decline depends on the relative importance of the positive and negative external effects, a topic we feel warrants more research.
 

Lars Persson

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Ph: +46 8 665 4504
lars.persson@ifn.se

Joacim Tåg

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Ph: +46 8 665 4524
joacim.tag@ifn.se

Nikita Koptyug

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Ph: +46 8 665 45 82
nikita.koptyug@ifn.se

Interdisciplinary European Studies

The European Union in a Changing World Order

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This book explores how the European Union responds to the ongoing challenges to the liberal international order. These challenges arise both within the EU itself and beyond its borders, and put into question the values of free trade and liberal democracy. 

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