Growth and Employment in Europe: Sustainability and Competitiveness, Department of Economics, WU (Wirtschaftsuniversität Wien)
Stock markets, shareholder value and investment
Abstract: The paper explores the effects of stock markets on
business investment. Next to the direct finance effect several indirect
channels are identified and discussed. These are the allocation of
investment, the effects through balance sheets on the stability of the
financial systems, the wealth effect on consumption and corporate
governance effects. Among these the intuitively appealing direct effect and
the indirect corporate governance effect are discussed most extensively.
The empirical evidence regarding the financing effect is clear, if
surprising. Stock markets play little role in financing investment and
investment reacts little, if at all, to changes in share prices. Changes in
corporate governance have gotten prominent recently. The paper proposes a
post-Keynesian model thereof and presents evidence that the increase in
shareholder power may have reduced investment.
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