Economic Growth and Equity Returns

Jay R. Ritter
2004 Social Science Research Network  
It is widely believed that economic growth is good for stockholders, and growth forecasts are a staple of international asset allocation decisions. However, the cross-country correlation of real stock returns and per capita GDP growth over 1900-2002 is negative. Alternatively stated, economic growth does not benefit equity holders. Equity holders receive dividends on the shares they own today. Economic growth occurs from high personal savings rates and increased labor force participation, and
more » ... articipation, and from technological change. If increases in capital and labor inputs go into new corporations, these do not boost the present value of dividends on existing corporations. Technological change does not increase profits unless firms have lasting monopolies, a condition that rarely occurs. Countries with high growth potential do not offer good equity investment opportunities unless valuations are low.
doi:10.2139/ssrn.667507 fatcat:vwnfuvcazjgcjc5tyiswmqngb4