Productivity and equity returns: A century of evidence for 9 OECD countries

Abstract

The share market boom in the 1990s is often linked to the acceleration in labour productivity over the same period. This paper explores the suggestions that labour productivity may be an inaccurate measure of firm’s cash flow which underlies equity valuations, and that innovations in productivity in the 1990s may have had only have temporary effects on capital productivity, the key element of the more correct measure of cash flow. Using a century of data for the OECD countries it is shown empirically that the link of productivity to share returns is indeed strongest for capital productivity, but generally the link is weaker that is sometimes maintained in the literature.