Is net stock issuance relevant to capital formation? Comparing heterodox models of firm-level capital expenditures across the advanced and largest developing economies

Smith, Ricardo, Marx and Keynes never claimed that stock markets were critical funding conduits for a firm’s capital expenditures. While Adam Smith had a rather poor opinion of the joint-stock form of business organisation, classical economists generally saw accumulated profits as the primary source of funding for capital investment. Keynes famously remarked in the General Theory that the ‘capital investment needs of a nation’ would likely be ‘ill served’ by stock markets. Prior empirical studies of financialisation found a deleterious impact from stock buybacks on capital investment; however, they did not match buybacks against new stock issuances. Using an unbalanced panel of firms located in China, France, Germany, Great Britain, India, Japan and the USA from 1998 to 2008, classical, post-Keynesian and financialisation models of firm-level investment were specified and estimated across the seven economies as well as individual countries. Net stock issuance is found to have a positive impact on real investment when estimated across all models and observations. Between the classical and post-Keynesian models, profitability, internal and external finance, macroeconomic demand as well as net stock issuance were positively related to capital expenditures; capital intensity in the classical model exhibited a negative association across all countries. For the financialisation model, interest and dividend payments were inversely associated with capital expenditures but not consistently so for individual countries. Macroeconomic growth had a consistently positive impact for most advanced economies, affirming the critical role played by aggregate demand in heterodox theories of business investment.