The Information Technology Revolution

NBER WORKING PAPER SERIES

THE INFORMATION TECHNOLOGY REVOLUTION

AND THE STOCK MARKET: EVIDENCE

Bart Hobijn

Boyan Jovanovic

Working Paper 7684

http://www.nber.org/papers/w7684

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue

Cambridge, MA 02138

May 2000

The paper is part of a project that includes J. Greenwood, and it implements many of his suggestions. We

thank H. Chun and V. Ramey for providing us with data, and T. Cooley, P. Gourinchas, R. Hall, L. Li, and

A. Viard for comments. The views expressed here are those of the authors and do not necessarily reflect the

views of the National Bureau of Economic Research.

© 2000 by Bart Hobijn and Boyan Jovanovic. All rights reserved. Short sections of text, not to exceed two

paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given

to the source.

The Information Technology Revolution and the Stock Market: Evidence

Bart Hobijn and Boyan Jovanovic

NBER Working Paper No. 7684

May 2000

JEL No. 03

ABSTRACT

Since 1968, the ratio of stock market capitalization to GDP has varied by a factor of 5. In 1972,

the ratio stood at above unity, but by 1974, it had fallen to 0.45 where it stayed for the next decade.

It then began a steady climb, and today it stands above 2. We argue that the IT revolution was

behind this and, moreover, that the capitalization/GDP ratio is likely to decline and then rise after

any major technological shift. The three assumptions that deliver the result are:

1. The IT revolution was anticipated by early 1973,

2. IT was resisted by incumbents, which led their value to fall, and

3. Takeovers are an imperfect policing device that allowed many firms to remain inefficient

until the mid-1980's.

We lay out some facts that the IT hypothesis explains, but that some alternative hypotheses --

oil-price shocks, increased market volatility, and bubbles -- do not.

Bart Hobijn Boyan Jovanovic

Department of Economics...