The Unassuming Economist

From a paper by Hui Zhou, and De-Xin Zhang:

“Previous studies have focused on size metrics when exploring the economic consequences of financial development. However, the size of financial markets does not necessarily relate to their level of development. On the basis of cross-country panel data, we explore the impact of a new measure of financial development – stock market concentration – on income inequality. We find that concentrated stock markets dominated by a small number of large cap firms exacerbate income inequality. This impact strengthens with stock market activity, but foreign direct investment and financial inclusion mitigate this impact. The effect of stock market concentration on income inequality is more pronounced in countries with poor governance and stock market-based financial systems. Further research shows that stock market concentration remains significantly positively related to income inequality after controlling for the stability of large enterprises. Mechanism tests suggest that concentrated stock markets exacerbate income inequality by discouraging entrepreneurship and new businesses.”