Is Economic Growth Good for Investors?
Jay R. Ritter
University of Florida
August 7, 2012
Preliminary
Abstract:
The cross-country correlation of GDP growth per capita and inflation-adjusted stock returns is negative when long periods are analyzed. This is surprising, since economic growth, and especially unexpected growth, is presumably good for profits. The result holds for both developed countries and emerging markets. Economic growth comes partly from increased inputs of capital and labor, which donāt necessarily benefit the stockholders of existing companies. Economic growth also comes from technological change, which does not necessarily lead to higher profits if competition between firms results in the benefits being passed to consumers and workers. Realized growth has both an expected and unexpected component.
Apparently investors overpay for expected growth, and this overpayment more than offsets the benefits of unexpected growth.
Acknowledgements: This paper is being written for the Journal of Applied Corporate Finance. This paper updates and extends the results, through 2011, that were contained in my 2005 Pacific-Basin Finance Journal article on āEconomic Growth and Equity Returns.ā Please see this earlier article for a more complete list of citations and references. I want to thank Leming Lin for excellent research assistance, and the editor, Don Chew, for extensive suggestions and guidance.
Read the entire paper in the slidedeck below, or download it using the link in the frame:
