Since 1968, the ratio of stock market capitalization to GDP has varied by a factor of 5. In 1972, the ratio stood at above unity, but by 1974, it had fallen to 0.45 where it stayed for the next decade. It then began a steady climb, and today it stands above 2. ; We argue that the IT revolution was behind this and, moreover, that the capitalization/GDP ratio is likely to decline and then rise after any major technological shift. The three assumptions that deliver the result are: 1) The IT revolution was anticipated by early 1973; 2) IT was resisted by incumbents, which led their value to fall and 3) Takeovers are an imperfect policing device that allowed many firms to remain inefficient until the mid 1980's. ; We lay out some facts that the IT hypothesis explains, but that some alternative hypotheses - oil-price shocks, increased market volatility, and bubbles - do not.
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Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.
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