Financial market concentration and misallocation

Daniel Neuhann and Michael Sockin

Journal of Financial Economics, 2024, vol. 159, issue C

Abstract: How does financial market concentration affect capital allocation? We propose a complete-markets model in which real investment and financial price impact are jointly determined in general equilibrium. We identify a two-way feedback mechanism whereby price impact induces misallocation and misallocation raises price impact. The mechanism is stronger if productivity is low or productivity dispersion is high. Given rising dispersion, the model can rationalize trends in corporate discount rates, cash holdings, investment, asset prices, and capital reallocation over the last two decades, even when market concentration is relatively stable. Overall, our findings suggest that financial market concentration may hamper allocative efficiency.

Keywords: Financial market concentration; Misallocation; Investment; Liquidity (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X24000989
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:159:y:2024:i:c:s0304405x24000989

DOI: 10.1016/j.jfineco.2024.103875

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().