Financial Markets and the Real Economy

Even though no new capital is raised in secondary financial markets (buyers and sellers simply trade second-hand, already-issued securities), such markets can have significant effects on the real economy. Under the contracting channel, the manager’s pay or reputation is tied to the stock price, so trading makes the stock price more reflective of his actions and encourages him to take value-maximizing actions to begin with. Under the learning channel, the manager learns information from the stock price to guide his actions – for example, he uses the stock price as a signal of his investment opportunities to decide how much to invest.

Survey

Survey (Bond, Edmans, Goldstein ARFE 2012)

    Theory

    Governance through exit with

    Manager learns from prices to guide real decisions (Edmans, Goldstein, Jiang AER 2015)

    Financial efficiency can reduce real efficiency (Edmans, Heinle, Huang RF 2016)

      Empirics

      Effect of prices on takeovers (Edmans, Goldstein, Jiang JF 2012)

      Effect of liquidity on governance (Edmans, Fang, Zur RFS 2013)

      Effect of prices on investment (Edmans, Jayaraman, Schneemeier, JFE 2017)