Working Paper: NBER ID: w7684
Authors: Bart Hobijn; Boyan Jovanovic
Abstract: Since 1968, the ratio of stock market capitalization to GDP has varied by a factor of 5. In 1972, the ratio stood at above unity, but by 1974, it had fallen to 0.45 where it stayed for the next decade. It then began a steady climb, and today it stands above 2. We argue that the IT revolution was behind this and, moreover, that the capitalization/GDP ratio is likely to decline and then rise after any major technological shift. The three assumptions that deliver the result are: 1. The IT revolution was anticipated by early 1973, 2. IT was resisted by incumbents, which led their value to fall, and 3. Takeovers are an imperfect policing device that allowed many firms to remain inefficient until the mid-1980's. We lay out some facts that the IT hypothesis explains, but that some alternative hypotheses -- oil-price shocks, increased market volatility, and bubbles -- do not.
Keywords: No keywords provided
JEL Codes: 03
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| anticipation of the IT revolution (D84) | stock market capitalization to GDP ratio (G10) |
| resistance from incumbent firms (L19) | market values decline (G19) |
| IT revolution (L86) | changes in market capitalization (G10) |
| inefficiency of incumbents (D61) | market performance during IT revolution (L86) |