Posted on : March 17, 2017
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Category : Economics

Prof. Daniel Greenwald (MIT Sloan School of Management), refutes the conventional wisdom that the stock market is driven by movements in productivity – stocks as a whole go up as firms become better at doing whatever it is they do. Greenwald explains how his research identified alternative forces that play a dominant role in driving the stock market especially at long horizons.  Despite the widespread belief that firm productivity is a key driver of stock market returns, our results indicate that fluctuations in productivity play only a small role. Far more influential over long periods is the economic redistribution between workers and shareholders — meaning how a company’s profits are divided between employees and investors. Stock price will rise whenever the rewards to the shareholders increase, which can be caused by one of three separate forces:

  1. Productivity: The firm becomes more productive, increasing its stream of revenues. This increases the size of both slices, including the shareholders’ slice.
  2. Redistribution: The size of the pie remains fixed, but the firm pays a smaller share to the workers, increasing the shareholders’ slice.
  3. Market confidence: Neither the size nor the division of the pie changes, but more risk-tolerant investors demand more stock despite there being no change in their current dividends.
Source: marketwatch.com