The World Federation of Exchanges has published research examining how equity market conditions affect economic growth, investment and the wider economy. The theoretical framework identifies four transmission channels: household consumption through equity wealth, business investment through valuations, external financing through corporate balance sheets, and productivity through improved capital allocation. Changes in equity prices principally affect the real economy through firms’ investment decisions, with stronger effects in advanced economies where equity markets are deeper and more closely linked to corporate finance. By contrast, long-term improvements in market depth, liquidity and institutional quality mainly support investment through productivity gains. This effect is larger in emerging market and developing economies, where financing constraints are more binding and improved capital allocation offers greater potential benefits.
World Federation of Exchanges research finds equity markets drive investment through different channels across economies
World Federation of Exchanges research finds that equity price changes affect the real economy mainly through corporate investment, particularly in advanced economies. Improvements in market depth, liquidity and institutional quality generate larger investment gains in emerging market and developing economies, primarily by improving capital allocation and productivity.