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Equity Prices, Productivity Growth, And ‘The New Economy’

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  • Jakob B Madsen
  • E Philip Davis

Abstract

The increase in equity prices over the 1990s has to a large degree been attributed to permanently higher productivity growth that is derived from the ‘new economy’ and related research and development (R&D) expenditures. This paper establishes a rational expectations model of technology innovations and equity prices, which shows that under plausible assumptions,productivity advances can only have temporary effects on fundamentals of equity prices. Using data on R&D capital and fixed capital productivity for 11 OECD countries, the evidence give strong support for the model by suggesting that technology innovations indeed have only temporary effects on equity returns.

Suggested Citation

  • Jakob B Madsen & E Philip Davis, 2003. "Equity Prices, Productivity Growth, And ‘The New Economy’," Economics and Finance Discussion Papers 03-04, Economics and Finance Section, School of Social Sciences, Brunel University.
    • Handle: RePEc:bru:bruedp:03-04
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    File URL: http://www.brunel.ac.uk/329/efwps/03-04.pdf
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G3 - Financial Economics - - Corporate Finance and Governance
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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