Presidential Address 2024: The Value and Profits of Firms

The real growth of the stock market value of firms 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 profits, starting in 1980. This paper proposes to decompose the value of firms based on profits (earnings) rather than dividends. Because firms on average pay out only half of profits in dividends, dividends poorly measure firm performance. I decompose the sources of the rise of the value of all publicly traded firms into the following categories: (1) the subjective and risk-free discount factor, (2) expected future profits, and (3) shareholder equity (retained earnings). I find that 20% of the rise is due to the discount factor and 80% is due to profits (45% current and future expected profits; 35% retained earnings). I build a general equilibrium model of the economy where firms have market power; I perform counterfactuals and evaluate the welfare implications. The objective is to study the impact of competition policy. If market power today dropped to the level of 1980, average stock market values would be 45% lower. Instead, if market power had never increased in 1980, the average stock values would be 80% lower.