The Value and Proï¬ ts of Firms

Jan Eeckhout

No 19232, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The real growth of the stock market value of ï¬ rms has increased from close to 0% on average per year between 1958 and 1980, to 5.2%between 1980 and today. This change coincides with the rise of market power and proï¬ ts, starting in 1980. This paper proposes to decompose the value of ï¬ rms based on proï¬ ts (earnings) rather than dividends. Because ï¬ rms on average pay out only 45% of proï¬ ts in dividends, dividends poorly measure ï¬ rm performance. I decompose the sources of the rise of the value of all publicly traded ï¬ rms into: 1. The subjective discount factor; 2. The risk-free rate; 3. Proï¬ ts; and 4. Shareholder Equity (retained earnings). I ï¬ nd that 20% of the rise is due to the discount factor, and 80% is due to proï¬ ts (half of which is retained earnings). I build a general equilibrium model of the economy where ï¬ rms have market power; I perform counter factuals and evaluate the welfare implications. The objective is to study the impact of competition policy. If market power today dropped to the level of1980, average stock market values would be 40% lower. If market power had never increased in 1980, the average stock values would be 80% lower.

Date: 2024-07
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