Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 1115: The Incredible Shrinking Stock Market: On the Political Economy Consequences of Excessive Delistings

Alexander Ljungqvist (), Lars Persson () and Joacim Tåg ()
Additional contact information
Alexander Ljungqvist: Stern School of Business, New York University, Postal: and Research Institute of Industrial Economics, P.O. Box 55665, SE-102 15 Stockholm, Sweden
Lars Persson: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden
Joacim Tåg: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden

Abstract: Over the past two decades, the U.S. stock market has halved in size as the “public firm model” has begun to fall out of favor. We develop a political economy model of delistings from the stock market to study the wider economic consequences of this trend. We show that the private and social incentives to delist firms from the stock market need not be aligned. Delistings can inadvertently impose an externality on the economy by reducing citizen-investors’ exposure to corporate profits and thereby undermining popular support for business-friendly policies. A shrinking stock market can trigger a chain of events that leads to long-term reductions in aggregate investment, productivity, and employment.

Keywords: Political economy; Stock market; Delistings; Corporate investment; Productivity

JEL-codes: G24; G34; P16

47 pages, First version: March 4, 2016. Revised: February 1, 2018. Earlier revisions: November 23, 2016, February 1, 2018.

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