The Shrinking Stock Market, Investibility, and Creative Destruction

Introduction

There are ever fewer listed firms in the U.S. and Europe, and listed firms produce an ever-shrinking share of innovation. Over the past 25 years, the number of firms listed on a stock exchange has dropped by 41% in the U.S. and 55% in Europe. At the same time, listed firms account for a shrinking share of the highly disruptive inventions that have the most potential to boost productivity and growth.

In the U.S., for example, listed firms account for only 8% of the most ground-breaking patents today, down from a peak of 34% in 1969. These two mega trends combine to make an ever-increasing share of innovation “uninvestible” for most individuals who, owing to investor-protection rules, are barred from investing in unlisted firms. The objective of my project is to study the economic consequences of this increasing wedge in access to the financial rewards of breakthroughs in science and technology between “the few” and “the many.”

Disruptive Innovation

Disruptive innovation creates winners and losers. Workers and savers can, in principle, hedge against the risk of losing their jobs or savings due to "creative destruction" by investing in the winners.

Investibility of Disruptive Innovation

Whether everyone or only the few can hedge depends on the extent to which disruptive innovation is publicly investible. I will measure the investibility of disruptive innovation over the period 1841 to today, taking into account that:

1. A disruptive innovation that is born private can become publicly investible as its creator goes public.
2. It can be acquired by a listed firm.
3. It can sell the patent to a listed firm.

Armed with this measure of risk-spanning, I will investigate how the economy-wide cost of capital is affected when limited investibility results in an unequal sharing of the benefits of disruptive innovation between the wealthy and the many.

Wealth Inequality

Finally, I will test if differential access to high-expected-return investment opportunities, as more and more economic activity takes place in private markets, can help explain the rise in wealth inequality.