Revisiting the Davis Thesis : Preliminary Evidence of Stock Market Impact on Industrial Concentration

Since Lance E. Davis developed his financial thesis, the claim that capital mobility has an inverse relationship to industrial concentration has gone unchallenged. However, evidence exists which suggests that the opposite relationship might be true: capital mobility may lead to a higher incidence of industrial concentration. In this paper, I use Daniel Verdier’s conception of capital mobility, which states that mobile capital is reflected by broad and deep securities markets. I argue that even mobile markets will treat large firms and small firms differently. Securities markets accentuate disparities between large and small firms in their ability to access capital, giving large firms the resources to grow relative to their peers. To test this hypothesis, I conduct case studies of the 1920’s and 1990’s period in the U.S., as well as employ a multivariate panel data regression analysis. The results support my hypothesis that strong securities market performance leads to greater industrial concentration, even when capital is more mobile. These results are at odds with Davis’ financial thesis.

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