The real effects of financial markets

Abstract

NBER WORKING PAPER SERIES THE REAL EFFECTS OF FINANCIAL MARKETS Philip Bond Alex Edmans Itay Goldstein Working Paper 17719 http://www.nber.org/papers/w17719 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 December 2011 The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2011 by Philip Bond, Alex Edmans, and Itay Goldstein. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. The Real Effects of Financial Markets Philip Bond, Alex Edmans, and Itay Goldstein NBER Working Paper No. 17719 December 2011 JEL No. G12,G14,G31,G34 ABSTRACT A large amount of activity in the financial sector occurs in secondary financial markets, where securities are traded among investors without capital flowing to firms. The stock market is the archetypal example, which in most developed economies captures a lot of attention and resources. Is the stock market just a side show or does it affect real economic activity? In this article, we discuss the potential real effects of financial markets that stem from the informational role of market …

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